<PAGE>
RULE NO. 424(b)(2)
REGISTRATION NOS. 33-62710
333-13617
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 10, 1996)
$189,244,907
(APPROXIMATE)
[LOGO]
--------------
MASTER SERVICER AND SELLER
BEAR STEARNS MORTGAGE SECURITIES INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-9
The Mortgage Pass-Through Certificates, Series 1996-9 (collectively, the
"Certificates"), consist of all Classes identified in the chart below (the
"Offered Certificates") as well as certain additional Classes of Other
Certificates (as hereinafter defined) which are not being offered for sale
hereunder. The original principal amount of one or more Classes of
Certificates may be increased or decreased by up to 10% prior to their
issuance, depending on the Mortgage Loans actually delivered to the Trustee
named herein, and may be adjusted as necessary to obtain the required ratings
on the Offered Certificates. It is a condition to their issuance that each
Class of Certificates receive the respective ratings (set forth under "Summary
of Terms--Rating") of Fitch Investors Service, L.P. and Standard & Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc.
(cover continued on next page)
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTERESTS IN BSMSI,
THE TRUSTEE, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, BSMSI, THE MASTER SERVICER
OR ANY OF THEIR AFFILIATES, OR ANY OTHER PERSON. DISTRIBUTIONS ON
THE CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS
TRANSFERRED OR PLEDGED TO THE TRUST FOR THE BENEFIT OF
CERTIFICATEHOLDERS.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------
<TABLE>
<S> <C> <C> <C> <C> <C>
$20,638,000 6.55% Class A-I-1 Certificates $25,000,000 8.00% Class A-I-11 Certificates
$ 3,685,000 11.00% Class A-I-2 Certificates $17,974,774 7.05% Class A-II Certificates
$ 5,459,000 6.80% Class A-I-3 Certificates $ 3,933 (3) Class PO Certificates
$13,885,000 7.00% Class A-I-4 Certificates (4) (4) Class X Certificates
$ 8,309,000 7.10% Class A-I-5 Certificates $ 6,244,000 8.00% Class B-1 Certificates
$ 6,317,000 7.10% Class A-I-6 Certificates $ 3,842,000 8.00% Class B-2 Certificates
$57,741,000 (1) Class A-I-7 Certificates $ 2,882,000 8.00% Class B-3 Certificates
(2) (2) Class A-I-8 Certificates $ 100 8.00% Class R-1 Certificates
$ 9,600,000 7.45% Class A-I-9 Certificates $ 100 (5) Class R-2 Certificates
$ 7,664,000 8.00% Class A-I-10 Certificates
</TABLE>
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(1) The Class A-I-7 Certificates will bear interest at 5.825% per annum during
the first Interest Accrual Period (as defined herein). During each
Interest Accrual Period thereafter, the Class A-I-7 Certificates will bear
interest, subject to a maximum rate of 9.00% per annum and a minimum rate
of 0.45% per annum, at a rate per annum equal to 0.45% in excess of the
London interbank offered rate for one-month U.S. dollar deposits
("LIBOR"), as more fully described herein.
(2) The Class A-I-8 Certificates will have a notional principal amount (the
"Class A-I-8 Notional Amount") equal to the Current Principal Amount of
the Class A-I-7 Certificates. The Class A-I-8 Certificates will bear
interest at 3.175% per annum during the first Interest Accrual Period.
During each Interest Accrual Period thereafter, the Class A-I-8
Certificates will bear interest, subject to a maximum rate of 8.55% per
annum and a minimum rate of 0% per annum, at a rate per annum equal to
8.55%-LIBOR.
(3) The Class PO Certificates will be principal only Certificates and will not
bear interest.
(4) The Class X Certificates will have a notional principal amount (the "Class
X Notional Amount") equal to the aggregate Scheduled Principal Balances
(as defined herein) of all of the Mortgage Loans and will bear interest on
the Class X Notional Amount at a variable Pass-Through Rate equal to the
excess of (a) the weighted average of the Net Rates of all of the Mortgage
Loans over (b) the weighted average of the Pass-Through Rates of ll of the
Certificates (other than the Class X Certificates). The Pass-Through Rate
for the Class X Certificates for the first Interest Accrual Period is
expected to be approximately 1.04% per annum.
(5) The Class R-2 Certificates will bear interest on their Current Principal
Amount at a variable Pass-Through Rate equal to the weighted average of
the Net Rates of the Group I Mortgage Loans (as defined herein).
--------------
Each Class of Offered Certificates (other than the Class PO Certificates)
will be purchased by Bear, Stearns & Co. Inc. (the "Underwriter") from BSMSI
and will be offered by the Underwriter from time to time in negotiated
transactions at varying prices to be determined at the time of sale. Proceeds
to BSMSI are expected to be approximately 103.0% of the aggregate principal
balance of such Offered Certificates plus accrued interest thereon, but before
deducting expenses payable by BSMSI in connection with the Offered
Certificates, estimated to be $350,000.
The Offered Certificates (other than the Class PO Certificates) are offered
by the Underwriter when, as and if issued, delivered to and accepted by the
Underwriter and subject to certain other conditions. It is expected that
delivery of the Class R-1 and Class R-2 Certificates will be made against
payment therefor at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167 and that delivery of the other Offered Certificates
will be made in book entry form only, through the Same Day Funds Settlement
System of The Depository Trust Company, in each case on or about December 23,
1996.
--------------
BEAR, STEARNS & CO. INC.
INCORPORATED
The date of this Prospectus Supplement is December 20, 1996
<PAGE>
(cover continued from previous page)
The Offered Certificates and the Other Certificates will represent, in
the aggregate, the entire beneficial ownership interest in a trust (the "Trust")
consisting primarily of two groups ("Mortgage Loan Group I" and "Mortgage Loan
Group II" and each, a "Mortgage Loan Group") of conventional one- to four-
family, fully amortizing, fixed rate, first lien residential mortgage loans with
original terms to maturity (based on the date of origination or any later
modification) of up to 30 years ("Group I Mortgage Loans" and "Group II Mortgage
Loans," respectively, and collectively, the "Mortgage Loans"). All Mortgage
Loans in Mortgage Loan Group I have Net Rates lower than or equal to 9.50% per
annum and all Mortgage Loans in Mortgage Loan Group II have Net Rates greater
than 9.50% per annum. The characteristics of the Mortgage Loans comprising each
Mortgage Loan Group are described herein under "Description of the Mortgage
Loans" and in Annex A hereto. All the Mortgage Loans will be acquired by Bear
Stearns Mortgage Securities Inc. ("BSMSI") on the date of issuance of the
Certificates from ICI Funding Corporation.
Distributions of interest and principal on the Class A-I Certificates
and principal on the Class PO Certificates, on the one hand, and distributions
of interest and principal on the Class A-II Certificates, on the other, will be
equal to an amount based on interest and principal received or advanced with
respect to the Group I Mortgage Loans (the Group I Discount Loans in the case of
the Class PO Certificates) and the Group II Mortgage Loans, respectively, except
under the limited circumstances described herein. The right of the holders of
the Class X and Class B Certificates (as defined herein) to receive
distributions with respect to the Mortgage Loans will be based upon interest and
principal received or advanced with respect to both Mortgage Loan Groups. Such
right in the case of the Class B Certificates will be subordinate to the rights
of the holders of the Senior Certificates (as defined herein). The rights of
holders of each Class of Class B Certificates will be subordinate to the rights
of any Class of Class B Certificates with a lower numerical designation.
Principal and interest on the Certificates are payable as described
herein on the 25th day of each month or, if such day is not a Business Day, then
on the next succeeding Business Day, beginning in January 1997 (each, a
"Distribution Date"). Interest will accrue on the Certificates (other than the
Class PO Certificates) at the applicable Pass-Through Rates described above and
will be distributed in the amounts as described under "Description of the
Certificates--Distributions on the Certificates--Interest" herein. Distributions
of principal among the Certificates will be made as described under "Description
of the Certificates--Distributions on the Certificates--Principal" herein.
Realized Losses (as defined under "Description of the Certificates--Allocation
of Losses; Subordination") on the Mortgage Loans will be allocated to the
Certificates as described under "Description of the Certificates--Allocation of
Losses; Subordination" herein.
There is currently no secondary market for the Offered Certificates and
there can be no assurance that one will develop. The Underwriter intends to
establish a market in the Offered Certificates being underwritten by it, but is
not obligated to do so. There is no assurance that any such market, if
established, will continue.
THE YIELD TO MATURITY OF EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS GENERALLY IN THE RELATED MORTGAGE
LOAN GROUP IN THE CASE OF THE CLASS A CERTIFICATES (AS DEFINED HEREIN), THE
GROUP I DISCOUNT MORTGAGE LOANS IN THE CASE OF THE CLASS PO CERTIFICATES, AND
THE MORTGAGE LOANS IN BOTH MORTGAGE LOAN GROUPS IN THE CASE OF THE CLASS X
CERTIFICATES AND THE CLASS B CERTIFICATES. THE MORTGAGE LOANS GENERALLY MAY BE
PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO MATURITY OF
A CLASS OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE
SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON. HOLDERS OF THE OFFERED
CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY SUCH CERTIFICATES PURCHASED AT
A DISCOUNT, AND INCLUDING THE CLASS PO CERTIFICATES IN THE CASE OF THE GROUP I
DISCOUNT MORTGAGE LOANS, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS ON THE APPLICABLE MORTGAGE LOANS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED
CERTIFICATES PURCHASED AT A PREMIUM, AND INCLUDING THE CLASS A-I-8 AND CLASS X
CERTIFICATES, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS
ON THE APPLICABLE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER
THAN THE ANTICIPATED YIELD. HOLDERS OF THE CLASS A-I-8 AND CLASS X CERTIFICATES
SHOULD CAREFULLY CONSIDER THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS ON
THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF SUCH HOLDERS TO RECOVER FULLY
THEIR INITIAL INVESTMENTS. THE
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<PAGE>
YIELD ON THE CLASS A-I-7 CERTIFICATES WILL BE SENSITIVE, AND THE YIELD ON THE
CLASS A-I-8 CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE LEVEL OF LIBOR. THE
YIELD TO INVESTORS IN THE OFFERED CERTIFICATES (PARTICULARLY THE CLASS B-1,
CLASS B-2 AND CLASS B-3 CERTIFICATES) ALSO WILL BE ADVERSELY AFFECTED BY
REALIZED LOSSES AND NET INTEREST SHORTFALLS (EACH AS DEFINED HEREIN) ON ALL OF
THE MORTGAGE LOANS. NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF
PREPAYMENTS ON ANY MORTGAGE LOANS, THE AMOUNT AND TIMING OF REALIZED LOSSES OR
INTEREST SHORTFALLS (AS DEFINED HEREIN) OR AS TO THE RESULTING YIELD TO MATURITY
OF ANY CLASS OF OFFERED CERTIFICATES. SEE "SUMMARY OF TERMS--YIELD AND
PREPAYMENT CONSIDERATIONS" AND "YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN.
As described herein, two separate real estate mortgage investment
conduit ("REMIC") elections will be made in connection with the Trust for
federal income tax purposes. As described more fully herein and in the
Prospectus, all of the Certificates (other than the Class R-1, Class R-2 and
Class X Certificates), as well as each of the Separate Components (as defined
herein) comprising the Class X Certificates, will be designated as "regular
interests" in a REMIC and the Class R-1 and Class R-2 Certificates will
represent the "residual interests" in such REMICs. See "Federal Income Tax
Considerations" herein and "Certain Federal Income Tax Consequences" in the
Prospectus. The Class R-1 and Class R-2 Certificates will be subject to certain
restrictions on transfer and may have tax liabilities during the early years of
the REMICs that substantially exceed the principal and interest paid thereon
during such period. See "Restrictions on Purchase and Transfer of the Residual
Certificates" herein.
ICI Funding Corporation (the "Master Servicer") will act as master
servicer of the Mortgage Loans and will make certain limited representations and
warranties concerning the Mortgage Loans. The obligations of ICI Funding
Corporation (and any successor Master Servicer) to repurchase or substitute for
a Mortgage Loan as to which a breach has occurred and is continuing will
constitute the sole remedies available to Certificateholders with respect to a
breach of any representations or warranties concerning the Mortgage Loans. BSMSI
will not make any representations or warranties for the benefit of the
Certificateholders and will not have any liability to the Certificateholders.
To the extent statements contained herein do not relate to historic or
current information, this Prospectus Supplement may be deemed to contain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "1933 Act"), and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "1934 Act"). Actual results could differ
materially from those contained in such statements as a result of the matters
set forth above, under "Summary of Terms--Yield and Prepayment Considerations"
and "Yield and Prepayment Considerations" and elsewhere in this Prospectus
Supplement.
The Offered Certificates offered by this Prospectus Supplement
constitute a portion of a separate series of Certificates being offered by BSMSI
pursuant to its Prospectus dated October 10, 1996, which this Prospectus
Supplement is a part of and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
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<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used but not defined in this
summary shall have the meaning assigned elsewhere in the Prospectus Supplement.
See "Index of Principal Definitions" herein.
Title of Series............ Mortgage Pass-Through Certificates, Series 1996-9
(the "Certificates"). The Offered Certificates and
the Other Certificates will represent in the
aggregate the entire beneficial ownership interest
in a trust (the "Trust") consisting primarily of
Group I Mortgage Loans and Group II Mortgage Loans
having aggregate principal balances as of the
Cut-off Date of approximately $172,536,445 and
$19,591,034, respectively. The Certificates will
be issued pursuant to a Pooling and Servicing
Agreement to be dated as of the Cut-off Date (the
"Agreement") among Bear Stearns Mortgage Securities
Inc., as seller ("BSMSI"), ICI Funding Corporation,
as master servicer (the "Master Servicer"), and
Bankers Trust Company of California, N.A., as
trustee (the "Trustee").
Offered Certificates....... Class A-I-1 6.55% $20,638,000
Class A-I-2 11.00% $ 3,685,000
Class A-I-3 6.80% $ 5,459,000
Class A-I-4 7.00% $13,885,000
Class A-I-5 7.10% $ 8,309,000
Class A-I-6 7.10% $ 6,317,000
Class A-I-7 (1) $57,741,000
Class A-1-8 (2) (2)
Class A-I-9 7.45% $ 9,600,000
Class A-I-10 8.00% $ 7,664,000
Class A-I-11 8.00% $25,000,000
Class A-II 7.05% $17,974,774
Class PO (3) $ 3,933
Class X Variable Rate $ (4)
Class B-1 8.00% $ 6,244,000
Class B-2 8.00% $ 3,842,000
Class B-3 8.00% $ 2,882,000
Class R-1 8.00% $ 100
Class R-2 Variable Rate $ 100
____________________
(1) The Class A-I-7 Certificates will bear interest
at 5.825% per annum during the first Interest
Accrual Period (as defined herein). During each
Interest Accrual Period thereafter, the Class
A-I-7 Certificates will bear interest, subject
to a maximum rate of 9.00% per annum and a
minimum rate of 0.45% per annum, at a rate per
annum equal to 0.45% in excess of the London
interbank offered rate for one-month U.S.
dollar deposits (LIBOR), as more fully
described herein.
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<PAGE>
(2) The Class A-I-8 Certificates will have a
notional principal amount (the Class A-I-8
Notional Amount) equal to the Current Principal
Amount of the Class A-I-7 Certificates. The
Class A-I-8 Certificates will bear interest at
3.175% per annum during the first Interest
Accrual Period. During each Interest Accrual
Period thereafter, the Class A-I-8 Certificates
will bear interest, subject to a maximum rate of
8.55% per annum and a minimum rate of 0% per
annum, at a rate per annum equal to 8.55% -
LIBOR.
(3) The Class PO Certificates are principal only
Certificates and will receive no interest.
(4) The Class X Certificates will have a Class X
Notional Amount equal to the aggregate Scheduled
Principal Balances of all of the Mortgage Loans.
For certain purposes as described herein, the
Class X Certificates are composed of Separate
Components which are not separately
transferable.
The original principal amount of one or more Classes
of Certificates may be increased or decreased by
BSMSI by up to 10%, depending upon the Mortgage
Loans actually acquired by BSMSI and delivered to
the Trustee. In addition, the original principal
amount of any Class of Certificates may be
adjusted, as necessary, to obtain the required
ratings on the Certificates from the Rating
Agencies. Accordingly, any investor's commitments
with respect to the Certificates may be
correspondingly decreased or increased.
Other Certificates........ In addition to the Offered Certificates, the Trust
will issue Class B-4, Class B-5 and Class B-6
Certificates (collectively, the "Other
Certificates") in aggregate original principal
amounts of approximately $1,152,000, $384,000 and
$1,346,573, respectively. Each of the Class B-4,
Class B-5 and Class B-6 Certificates will bear
interest at the rate of 8.00% per annum.
Any information contained herein with respect to the
Other Certificates is provided only to permit a
better understanding of the Offered Certificates.
Designations
Certificates.............. Offered Certificates and Other Certificates.
Offered Certificates...... Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4,
Class A-I-5, Class A-I-6, Class A-I-7, Class A-I-
8, Class A-I-9, Class A-I-10, Class A-I-11, Class
A-II, Class PO, Class X, Class B-1, Class B-2,
Class B-3, Class R-1 and Class R-2 Certificates.
Other Certificates........ Class B-4, Class B-5 and Class B-6 Certificates (not
offered hereby).
S-5
<PAGE>
Class A-I Certificates........ Class A-I-1, Class A-I-2, Class A-I-3, Class
A-I-4, Class A-I-5, Class A-I-6, Class A-I-7,
Class A-I-8, Class A-I-9, Class A-I-10 and
A-I-11 Certificates.
Class A Certificates.......... Class A-I and Class A-II Certificates.
Class B Certificates.......... Class B-1, Class B-2, Class B-3, Class B-4,
Class B-5 and Class B-6 Certificates.
Floating Rate Certificates.... Class A-I-7 Certificates.
Inverse Floating Rate
Certificates.................. Class A-I-8 Certificates.
Senior Certificates........... Class A, Class PO, Class X and Class R-1 and
Class R-2 Certificates.
Subordinate Certificates...... Class B Certificates.
Regular Certificates.......... All Classes of Certificates other than the Class
R-1 and Class R-2 Certificates.
Residual Certificates......... Class R-1 and Class R-2 Certificates.
Physical Certificates......... Class R-1 and Class R-2 Certificates.
Book-Entry Certificates....... All Offered Certificates other than the Physical
Certificates.
Denominations................. Each Class of Book-Entry Certificates will be
registered as a single Certificate held by a
nominee of The Depository Trust Company, and
beneficial interests will be held by investors
through the book-entry facilities of The
Depository Trust Company, as described herein,
in minimum denominations of $25,000, except
for the Class A-I-8 and Class X Certificates
which shall be in minimum notional
denominations of $500,000 and $1,000,000,
respectively, and in each case increments of
$1 in excess thereof. One Certificate of each
Class of Book-Entry Certificates may be issued
in a different principal amount to accommodate
the remainder of the initial principal amount
of the Certificates of such Class.
The Physical Certificates will be issued in
certificated fully-registered form. The Class
R-1 and Class R-2 Certificates will be issued
in a single certificate of $100 each.
Depositor..................... BSMSI. See "Bear Stearns Mortgage Securities
Inc." in the Prospectus.
Master Servicer............... ICI Funding Corporation will act as master
servicer with respect to the Mortgage Loans
and is sometimes referred to herein as the
"Master Servicer" or "ICI Funding." The
Mortgage Loans will be subserviced by Wendover
Funding, Inc., a wholly-owned subsidiary of
State Street Bank and Trust Company
S-6
<PAGE>
("Wendover"). See "ICI Funding--The Master
Servicer; the Sub-Servicer" herein.
Trustee.................. Bankers Trust Company of California, N.A., a national
banking association located in Irvine, California.
Cut-off Date............. December 1, 1996.
Closing Date............. On or about December 23, 1996.
The Mortgage Loans....... The Mortgage Loans will consist of conventional, one-
to four-family, fully amortizing, fixed rate
Mortgage Loans secured by first liens on
residential real properties (the "Mortgaged
Properties") and having an aggregate principal
balance as of the Cut-off Date of approximately
$192,127,480 (the "Cut-off Date Scheduled Principal
Balance"). The Mortgage Loans are divided into two
groups (Mortgage Loan Group I and Mortgage Loan
Group II) designated as the Group I Mortgage Loans
and the Group II Mortgage Loans, having aggregate
Cut-off Date Scheduled Principal Balances of
$172,536,445 and $19,591,034, respectively. All of
the Mortgage Loans in Mortgage Loan Group I have
Net Rates lower than or equal to 9.50% per annum
and all of the Mortgage Loans in Mortgage Loan
Group II have Net Rates greater than 9.50% per
annum. All of the Mortgage Loans will be acquired
by BSMSI on the date of issuance of the
Certificates from the Master Servicer.
Group I Mortgage Loans. Approximately $10,448,427
aggregate principal balance of the Group I Mortgage
Loans have original terms to stated maturity of up
to 15 years and approximately $162,088,018
aggregate principal balance of the Group I Mortgage
Loans have original terms to stated maturity of
greater than 15 but not more than 30 years, in each
case based on the date of origination or any later
modification. As of the Cut-off Date, the weighted
average calculated remaining term to maturity of
the Group I Mortgage Loans was approximately 346
months. The original principal balances of the
Group I Mortgage Loans ranged from approximately
$22,000 to approximately $735,000 and the average
principal balance at origination was approximately
$158,589. As of the Cut-off Date, the outstanding
principal balances of the Group I Mortgage Loans
ranged from approximately $21,944 to approximately
$734,173, and the average outstanding principal
balance as of the Cut-off Date was approximately
$158,290.
The Mortgage Rates on the Group I Mortgage Loans are
fixed rates ranging from 8.25% per annum to 9.75%
per annum, with a weighted average Mortgage Rate as
of the Cut-off Date of approximately 9.076% per
annum. The weighted average Net Rate on the Group
I Mortgage Loans as of the Cut-off Date is
approximately 8.811% per annum.
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<PAGE>
Approximately 45.62%, 16.33%, 10.97% and 5.67% of the
Group I Mortgage Loans (measured by Cut-off Date
Scheduled Principal Balance) are secured by
Mortgaged Properties located in California,
Florida, New Jersey and New York, respectively.
Group II Mortgage Loans. Approximately $574,159
aggregate principal balance of the Group II
Mortgage Loans have original terms to stated
maturity of up to 15 years and approximately
$19,016,875 aggregate principal balance of the
Group II Mortgage Loans have original terms to
stated maturity of greater than 15 but not more
than 30 years, in each case based on the date of
origination or any later modification. As of the
Cut-off Date, the weighted average calculated
remaining term to maturity of the Group II Mortgage
Loans was approximately 351 months. The original
principal balances of the Group II Mortgage Loans
ranged from approximately $26,550 to approximately
$514,300 and the average principal balance at
origination was approximately $106,063. As of the
Cut-off Date, the outstanding principal balances of
the Group II Mortgage Loans ranged from
approximately $26,022 to approximately $513,843,
and the average outstanding principal balance as of
the Cut-off Date was approximately $105,897.
The Mortgage Rates on the Group II Mortgage Loans are
fixed rates ranging from 9.875% per annum to 15.99%
per annum, with a weighted average Mortgage Rate as
of the Cut-off Date of approximately 10.410% per
annum. The weighted average Net Rate on the Group
II Mortgage Loans as of the Cut-off Date is
approximately 10.145% per annum.
Approximately 25.29%, 20.38%, 22.50% and 5.95% of the
Group II Mortgage Loans (measured by Cut-off Date
Scheduled Principal Balance) are secured by
Mortgaged Properties located in California,
Florida, New Jersey and New York, respectively.
For a further description of the Mortgage Loans, see
"Description of the Mortgage Loans" herein and
Annex A attached hereto.
Net Rate................. The "Net Rate" for each Mortgage Loan is the interest
rate borne by such Mortgage Loan (the "Mortgage
Rate"), less the sum of the Master Servicing Fee
and the Trustee's Fee attributable thereto (in each
case expressed as a per annum rate) (the "Aggregate
Expense Rate"). It is expected that with respect
to each Distribution Date, the Master Servicing Fee
(which includes the fee payable to the Sub-Servicer
(as defined herein)) for the Mortgage Loans will be
0.25% per annum, and the Trustee's Fee will be
0.015% per annum, of the Scheduled Principal
Balance of each Mortgage Loan as of the Due Date in
the month preceding the month in which such
Distribution Date occurs. For any Distribution
Date, the "Due Date" will be the first day of the
month in which such Distribution Date occurs.
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<PAGE>
The "Scheduled Principal Balance" of a Mortgage Loan
with respect to a Distribution Date is (i) the
unpaid principal balance of such Mortgage Loan as
of the close of business on the Due Date in the
month preceding the month of the Distribution Date
(i.e., taking account of the principal payment to
be made on such Due Date and irrespective of any
delinquency in its payment), as specified in the
amortization schedule at the time relating thereto
(before any adjustment to such amortization
schedule by reason of any bankruptcy or similar
proceeding occurring after the Cut-off Date (other
than a Deficient Valuation, as defined under
"Description of the Certificates--Allocation of
Losses; Subordination" herein) or any moratorium or
similar waiver or grace period) less (ii) any
Principal Prepayments and the principal portion of
any Net Liquidation Proceeds (as defined herein)
received during or prior to the related Prepayment
Period (as defined herein); provided that the
Scheduled Principal Balance of any Liquidated
Mortgage Loan (as defined herein) is zero.
Distribution Dates........ The 25th day of each month, or if such day is not a
Business Day, then the next succeeding Business
Day, beginning in January 1997 (each, a
"Distribution Date").
Record Date............... The "Record Date" for each Distribution Date will be
the close of business on the last business day of
the month preceding the month in which such
Distribution Date occurs.
Due Period................ With respect to each Distribution Date, the period
commencing on the second day of the month preceding
the month in which the Distribution Date occurs and
ending at the close of business on the first day of
the month in which the Distribution Date occurs
(each, a "Due Period").
Prepayment Period......... With respect to each Distribution Date, the period
from the first day through the last day of the
month preceding the month of such Distribution Date
(each, a "Prepayment Period").
Distributions on the
Certificates.............. General. On each Distribution Date, (i) the Senior
Certificates will be entitled to receive all
amounts distributable to them for such Distribution
Date before any distributions are made to the
Classes of Subordinate Certificates on such date
and (ii) the Subordinate Certificates of each Class
will be entitled to receive all amounts
distributable to them for such Distribution Date
before any distributions are made on such date on
any Class of Subordinate Certificates with a higher
numerical Class designation. In general, an amount
equal to the Group I Available Funds (as defined
herein) for such Distribution Date will be
allocated first, to pay interest due the holders of
the Class A-I Certificates and the Residual
Certificates and Class X Component I Accrued
Certificate Interest (as defined herein) and then
to reduce the Current Principal Amounts of the
Senior Certificates (other than the Class A-II
Certificates); second,
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subject to the limitations described herein, to pay
the Class PO Deferred Amount for such Distribution
Date to the Class PO Certificates; and third, to
pay interest on and then principal of each Class of
Subordinate Certificates in the order of their
numerical Class designations. In general, an amount
equal to the Group II Available Funds (as defined
herein) for such Distribution Date will be
allocated first, to pay interest due on the Class
A-II Certificates and Class X Component II Accrued
Certificate Interest (as defined herein) and then
to reduce the Current Principal Amount of the Class
A-II Certificates; and second, to pay interest on
and then principal of each Class of Subordinate
Certificates in the order of their numerical Class
designations. The Group I Available Funds and the
Group II Available Funds in the aggregate (the
"Available Funds") will be allocated among the
Classes of Certificates in the manner set forth in
"Description of the Certificates--Distributions on
the Certificates--Allocation of Available Funds"
herein. No distribution of interest or principal
from Group I Available Funds or from Group II
Available Funds will be made on any Class of
Subordinate Certificates on any Distribution Date
until all distributions of interest and principal
have been made on such date on each Class of
Certificates having a higher priority with respect
to the same Available Funds.
Interest. Interest will accrue during the preceding
Interest Accrual Period for each interest-bearing
Class of Certificates at the related rate described
below (each, a "Pass-Through Rate") on the Current
Principal Amount (as defined below), Class A-I-8
Notional Amount or Class X Notional Amount of such
Class immediately preceding such Distribution Date.
The Class PO Certificates are principal only
Certificates and will not bear interest. With
respect to each Distribution Date, the "Interest
Accrual Period" for each Class of interest-bearing
Certificates (other than the Class A-I-7 and Class
A-I-8 Certificates) will be the calendar month
preceding the month in which the Distribution Date
occurs, commencing in December 1996. The Interest
Accrual Period for the Class A-I-7 and Class A-I-8
Certificates for each Distribution Date will
commence on the 25th day of the calendar month
preceding the calendar month in which such
Distribution Date occurs and will end on the 24th
day of the calendar month in which such
Distribution Date occurs. Interest will be
calculated on the basis of a 360-day year comprised
of twelve 30-day months.
Each interest-bearing Class of Certificates (other
than the Floating Rate, Inverse Floating Rate,
Class X and Class R-2 Certificates) will bear
interest at the fixed Pass-Through Rates set forth
on the cover page hereof.
The Class A-I-7 Certificates will bear interest at
5.825% per annum during the first Interest Accrual
Period. During each Interest Accrual Period
thereafter, the Class A-I-7 Certificates will bear
interest subject to maximum rate of 9.00% per annum
and a
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<PAGE>
minimum rate of 0.45% per annum, at a rate per
annum equal to 0.45% in excess of LIBOR, as more
fully described herein.
The Class A-I-8 Certificates will bear interest on
the Class A-I-8 Notional Amount at 3.175% per annum
during the first Interest Accrual Period. During
each Interest Accrual Period thereafter, the Class
A-I-8 Certificates will bear interest on the Class
A-I-8 Notional Amount subject to a maximum rate of
8.55% per annum and a minimum rate of 0% per annum,
at a rate equal to 8.55% - LIBOR, as more fully
described herein.
The Class X Certificates will bear interest on the
Class X Notional Amount at a variable Pass-Through
Rate equal to the excess of (a) the weighted
average of the Net Rates of all of the Mortgage
Loans over (b) the weighted average of the Pass-
Through Rates of all of the Certificates (other
than the Class X Certificates). The Pass-Through
Rate for the Class X Certificates for the first
Interest Accrual Period is expected to be
approximately 1.04% per annum.
In order to calculate the source of interest due on
the Class X Certificates and for REMIC purposes,
the Class X Certificates are deemed to consist of
separate components (each, a "Separate Component"),
certain of which correspond to the Class A-I
Certificates, the Class R-1 Certificates and a
principal amount of the Class B Certificates which
derives its distributions from the Group I Mortgage
Loans (collectively, "Component I") and one which
corresponds to the Class A-II Certificates and the
principal amount of the Class B Certificates which
derives its distributions from the Group II
Mortgage Loans ("Component II").
Since interest on the Class X Certificates is based
on amounts paid on both the Group I Mortgage Loans
and the Group II Mortgage Loans, the Accrued
Certificate Interest for the Class X Certificates
may also be expressed as the sum of the Class X
Component I Accrued Certificate Interest and the
Class X Component II Accrued Certificate Interest
(each as defined herein.)
The Class R-2 Certificates will bear interest on
their Current Principal Amount at a variable Pass-
Through Rate equal to the weighted average of the
Net Rates of the Group I Mortgage Loans.
On each Distribution Date, interest will be
distributable on each interest-bearing Class of
Certificates from the Group I Available Funds
and/or Group II Available Funds, as described
above, for such Distribution Date in an aggregate
amount equal to the Accrued Certificate Interest
for such Class on such Distribution Date, plus any
Accrued Certificate Interest thereon remaining
undistributed from previous Distribution Dates.
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<PAGE>
The "Accrued Certificate Interest" for any interest-
bearing Certificate for any Distribution Date will
equal the interest accrued during the related
Interest Accrual Period at the applicable Pass-
Through Rate on the Current Principal Amount (or,
in the case of the Class A-I-8 Certificates, the
Class A-I-8 Notional Amount and in the case of the
Class X Certificates, the Class X Notional Amount)
of such Certificate immediately prior to such
Distribution Date less (i) in the case of an
interest-bearing Senior Certificate, such
Certificate's share of any Net Interest Shortfall
and the interest portion of any Excess Losses (each
as defined herein) and, after the Distribution Date
on which the Current Principal Amounts of the
Subordinate Certificates are reduced to zero (the
"Cross-Over Date"), the interest portion of any
Realized Losses and (ii) in the case of a
Subordinate Certificate, such Certificate's share
of any Net Interest Shortfall and the interest
portion of any Realized Losses.
Such shortfalls and losses will be allocated among
the Senior Certificates in proportion to the amount
of Accrued Certificate Interest that would have
been allocated thereto in the absence of such
shortfalls or losses. See "Description of the
Certificates--Distributions on the Certificates--
Interest" and "--Allocation of Losses;
Subordination" herein.
Any Interest Shortfalls resulting from prepayments
from the first through the last day of such month
will be offset by the Master Servicer to the extent
such Interest Shortfalls do not exceed the lesser
of (i) the Master Servicing Fee in connection with
such Distribution Date or (ii) 1/12 of 0.125% of
the Scheduled Principal Balances of the Mortgage
Loans with respect to such Distribution Date (the
amount of such fee so used, a "Compensating
Interest Payment"). No assurance can be given that
the servicing compensation available to cover
Interest Shortfalls will be sufficient therefor.
See "The Pooling and Servicing Agreement--Servicing
Compensation and Payment of Expenses" herein.
The "Current Principal Amount" of any Certificate
(other than a Class A-I-8 Certificate or a Class X
Certificate) as of any Distribution Date will equal
such Certificate's initial principal amount on the
Closing Date as reduced by (i) all amounts
distributed on previous Distribution Dates on such
Certificate on account of principal (and the Class
PO Cash Shortfall with respect to a Class PO
Certificate), (ii) the principal portion of all
Realized Losses previously allocated to such
Certificate and (iii) in the case of a Subordinate
Certificate, such Certificate's share, if any, of
the Subordinate Certificate Writedown Amount and
the Class PO Deferred Payment Writedown Amount
(each, as defined herein) for previous Distribution
Dates.
The Class A-I-8 Certificates will have a notional
principal balance equal to the Current Principal
Amount of the Class A-I-7 Certificates.
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<PAGE>
The Class X Certificates will have a notional
principal balance equal to the aggregate Scheduled
Principal Balances of all of the Mortgage Loans.
Principal. Principal will be distributable monthly
on the Senior Certificates (other than the Class A-
I-8 and Class X Certificates) on each Distribution
Date in an aggregate amount equal to the sum of the
Group I Senior Optimal Principal Amount, the Class
PO Principal Distribution Amount and the Group II
Senior Optimal Principal Amount (each as defined
herein) for such Distribution Date to the extent of
the Group I Available Funds or Group II Available
Funds, as applicable, subject to certain limited
exceptions, for such Distribution Date, remaining
after distributions of interest are made on the
related interest-bearing Senior Certificates on
such date. Subject to such limitation, the Group I
Senior Optimal Principal Amount, the Class PO
Principal Distribution Amount and the Group II
Senior Optimal Principal Amount will be allocated
among the Senior Certificates in the manner
described herein.
Principal will be distributed monthly on each Class
of Subordinate Certificates on each Distribution
Date in an aggregate amount equal to such Class's
Allocable Share (as defined herein) for such
Distribution Date to the extent of the sum of the
Group I Available Funds and the Group II Available
Funds remaining after (i) distributions of interest
and principal have been made on each Senior
Certificate entitled thereto as described herein,
(ii) subject to the limitations described herein,
the Class PO Deferred Amount for such Distribution
Date has been distributed in respect of the Class
PO Certificates, (iii) distributions of interest
and principal have been made on each Class of
Subordinate Certificates, if any, with a lower
numerical Class designation than such Class and
(iv) distributions of interest have been made on
such Class of Subordinate Certificates.
Distributions of principal on a Class of Certificates
will be made on a pro rata basis among all
outstanding Certificates of such Class. See
"Description of the Certificates--Distributions on
the Certificates" herein.
Class PO Deferred Amount. On each Distribution Date,
the PO Percentage (as defined herein) of the
principal portion of any Realized Loss in respect
of a Group I Discount Mortgage Loan (as defined
herein) will be allocated to the Class PO
Certificates. See "Description of the
Certificates--Allocation of Losses; Subordination"
herein. On each Distribution Date through the
Cross-Over Date, the Class PO Certificates will be
entitled to receive, to the extent of Group I
Available Funds remaining after distributions of
interest and principal on the Senior Certificates
(other than the Class A-II Certificates and the
Class X Component II Accrued Certificate Interest
on the
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<PAGE>
Class X Certificates) have been made from such
funds on such Distribution Date, any Class PO
Deferred Amount for such Distribution Date;
provided, that distributions in respect of the
Class PO Deferred Amount on any Distribution Date
will not exceed the excess, if any, of (x) the
Available Funds (as defined herein) remaining after
giving effect to the distributions pursuant to
priorities (A) first through third and (B) first
through third under "Description of the
Certificates--Distributions on the Certificates"
herein over (y) the amount of Accrued Certificate
Interest for such Distribution Date and Accrued
Certificate Interest remaining undistributed from
previous Distribution Dates on all Classes of
Subordinate Certificates. Distributions in respect
of the Class PO Deferred Amount shall not reduce
the Current Principal Amount of the Class PO
Certificates. The "Class PO Deferred Amount" means,
as to each Distribution Date through the Cross-Over
Date, the aggregate of all amounts allocable on
such date to the Class PO Certificates in respect
of the principal portion of Realized Losses (other
than Excess Losses) and Class PO Cash Shortfall and
all amounts previously allocated in respect of such
losses (other than Excess Losses) and Class PO Cash
Shortfall to the Class PO Certificates and not
distributed on prior Distribution Dates.
Additional Rights of the
Residual Certificates..... In addition to distributions of principal and
interest, the holders of the Residual Certificates
will be entitled to receive (i) the amount, if any,
of Available Funds remaining on any Distribution
Date after distributions of interest and principal
are made on the Certificates on such date and (ii)
the proceeds, if any, of the assets of the Trust
remaining after the Current Principal Amount of
each Class of Certificates has been reduced to
zero. It is not anticipated that any material
assets will be remaining for such distributions at
any such time.
Credit Enhancement--
General................... Credit enhancement for the Senior Certificates will
be provided by the Subordinate Certificates.
Credit enhancement for each Class of Subordinate
Certificates will be provided by the Class or
Classes of Subordinate Certificates with higher
numerical Class designations.
Credit Enhancement--
Subordination............. The rights of the holders of each Class of
Subordinate Certificates to receive distributions
with respect to the Mortgage Loans will be
subordinated to such rights of the holders of the
related Senior Certificates and of each Class of
Subordinate Certificates having a lower numerical
Class designation than such Class. The
subordination of the Subordinate Certificates to
Senior Certificates, and the further subordination
among the Subordinate Certificates, are each
intended to increase the likelihood of timely
receipt by the holders of Certificates with higher
relative payment priority of the maximum amount to
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<PAGE>
which they are entitled on any Distribution Date
and to provide such holders protection against
losses resulting from defaults on Mortgage Loans to
the extent described herein. The Subordinate
Certificates also provide protection to a lesser
extent against Special Hazard Losses, Fraud Losses
and Bankruptcy Losses (each as defined herein) to
the extent described herein. However, in certain
circumstances, the amount of available
subordination (including the limited subordination
provided for certain types of losses) may be
exhausted and shortfalls in distributions on the
Offered Certificates could result. Except with
respect to the Class PO Certificates as described
below, holders of Senior Certificates will bear
their pro rata share of any Realized Losses with
respect to Mortgage Loans in both Mortgage Loan
Groups in excess of the available total
subordination amount. See "Description of the
Certificates--Distributions on the Certificates,"
"--Allocation of Losses; Subordination" and "--
Subordination" herein.
Since the Subordinate Certificates will absorb
Realized Losses on Mortgage Loans in both Mortgage
Loan Groups, a disproportionate amount of Realized
Losses with respect to Mortgage Loans in either
Mortgage Loan Group will adversely impact the
availability of subordination to the Certificates
related to the other Mortgage Loan Group.
As of the Closing Date, the aggregate Current
Principal Amounts of all classes of Subordinate
Certificates and of the Other Certificates will
equal approximately 8.25% and 1.50%, respectively,
of the aggregate Current Principal Amounts of all
Classes of Certificates.
In addition, to extend the period during which the
Subordinate Certificates remain available as credit
enhancement for the Senior Certificates, the entire
amount of any prepayments and certain other
unscheduled recoveries of principal with respect to
the Mortgage Loans will be allocated to the related
Senior Certificates to the extent described herein
during the first five years after the Cut-off Date
(with such allocation being subject to reduction
thereafter as described herein). This allocation
has the effect of accelerating the amortization of
the related Senior Certificates as a whole while,
in the absence of losses in respect of the Mortgage
Loans, increasing the percentage interest in the
principal balance of the Mortgage Loans in both
Mortgage Loan Groups evidenced by the Subordinate
Certificates. See "Description of the
Certificates--Distributions on the Certificates"
and "--Subordination" herein.
In certain other instances as described in paragraph
(D) under "Description of the Certificates --
Distributions on the Certificates -- Allocation of
Available Funds," Principal Prepayments otherwise
distributable to the Class B Certificates will in
lieu thereof be distributed to Senior Certificates.
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<PAGE>
Monthly Advances.......... The Master Servicer will be obligated to advance
delinquent scheduled payments of principal and
interest on the Mortgage Loans under certain
circumstances (each such advance, a "Monthly
Advance"). See "The Pooling and Servicing
Agreement--Monthly Advances" herein.
Allocation of Losses...... Subject to the limitations set forth below, Realized
Losses on the Mortgage Loans will be allocated as
follows: first, among the Subordinate Certificates
in the inverse order of their numerical Class
designations beginning with the Class B-6
Certificates and second, pro rata to the Classes of
Senior Certificates as described herein, until, in
each case, the Current Principal Amount of each
such Class of Certificates is reduced to zero. The
aggregate amounts of Realized Losses which may be
allocated by means of Subordination to cover
Special Hazard Losses, Fraud Losses and Bankruptcy
Losses are initially limited to $1,921,275,
$3,842,550 and $100,000, respectively. All of the
foregoing amounts are subject to periodic reduction
as described herein.
Any Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the respective
amounts of coverage therefor ("Excess Special
Hazard Losses," "Excess Fraud Losses" and "Excess
Bankruptcy Losses," respectively, and collectively,
"Excess Losses") on Non-Discount Mortgage Loans in
Mortgage Loan Group I will be allocated on a pro
rata basis among the Senior Certificates (other
than the Class PO Certificates) and Subordinate
Certificates (any such Realized Losses so allocated
to such Senior Certificates will be allocated pro
rata without priority among the various Classes
thereof). The principal portion of such losses on
Group I Discount Mortgage Loans will be allocated
to the Class PO Certificates in an amount equal to
the related PO Percentage thereof, and the
remainder of such losses on Discount Mortgage Loans
will be allocated among the remaining Senior
Certificates on a pro rata basis as described
above. After the Cross-Over Date, all Realized
Losses (including, without limitation, all Special
Hazard Losses, Fraud Losses and Bankruptcy Losses)
on Group I Mortgage Loans will be allocated among
the Senior Certificates as described above. The
amount of any Realized Loss (other than an Excess
Loss) allocated to the Class PO Certificates on or
prior to the Cross-Over Date will be treated as
Class PO Deferred Amount. Prior to the Cross-Over
Date, Excess Losses on Group II Mortgage Loans, and
after the Cross-Over Date, all Realized Losses on
Group II Mortgage Loans will be allocated on a pro
rata basis among the Senior Certificates (other
than the Class PO Certificates). See "Description
of the Certificates--Allocation of Losses;
Subordination" herein.
Neither the Offered Certificates nor the Mortgage
Loans are insured or guaranteed by any governmental
agency or
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<PAGE>
instrumentality or by BSMSI, the Trustee, the
Master Servicer or any affiliate thereof or any
other person.
Yield and Prepayment
Considerations............ General Considerations. The yield to maturity of
each Class of Offered Certificates will be affected
by the amount and timing of principal payments on
the related Mortgage Loans, the allocation of Group
I Available Funds and/or Group II Available Funds,
as applicable, to such Class of Certificates, the
applicable Pass-Through Rate for such Class of
Certificates and the purchase price paid for such
Certificates. In addition, the yields to investors
in the Certificates will be adversely affected by
Realized Losses and Net Interest Shortfalls
allocated thereto. Furthermore, the yield to
investors in the Floating Rate Certificates and
Inverse Floating Rate Certificates will be affected
by the future levels of LIBOR. The interaction of
the foregoing factors may have different effects on
the various Classes of Certificates and the effects
on any Class may vary at different times during the
life of such Class. No representation is made as
to the anticipated rate of prepayments on any
Mortgage Loans, the amount or timing of Realized
Losses or Net Interest Shortfalls, future levels of
LIBOR or the anticipated yield to maturity of any
Certificates. Prospective investors are urged to
consider their own estimates as to the anticipated
rate of future prepayments on the Mortgage Loans
and the suitability of the Certificates to their
investment objectives. In addition to the
discussion below, prospective investors should
review the discussion under "Yield and Prepayment
Considerations" herein and in the Prospectus.
Mortgage Loan Payments. If prevailing mortgage rates
fall significantly below the Mortgage Rates on the
Mortgage Loans, the Mortgage Loans are likely to be
subject to higher prepayment rates than if
prevailing rates remain at or above the Mortgage
Rates on the Mortgage Loans. Other factors
affecting prepayments of Mortgage Loans include
changes in Mortgagors' housing needs, job
transfers, unemployment, net equity in the
Mortgaged Properties and servicing decisions.
Amounts received by virtue of liquidations of
Mortgage Loans, repurchases of Mortgage Loans upon
breach of representations or warranties and
optional termination of the Trust also affect the
receipt of principal on the Mortgage Loans. In
general, the Mortgage Loans may be prepaid at any
time without penalty. In addition, the rate of
prepayments will be affected by the rate and timing
of the sale of the Mortgaged Properties because all
of the Mortgage Loans contain due-on-sale clauses.
Timing of Payments and Distributions. Unlike certain
corporate bonds, the timing and amount of principal
payments on the Certificates are not fixed because
they are generally determined by the timing and
amount of principal payments on the applicable
Mortgage Loans. The timing of payments on the
applicable Mortgage Loans may significantly affect
an investor's yield. In general, the earlier a
prepayment of principal on the applicable Mortgage
Loans, the greater will be the effect on an
investor's yield to maturity. As a result, the
effect on
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<PAGE>
an investor's yield of principal prepayments
occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period
immediately following the issuance of the
Certificates will not be offset by a subsequent
like reduction (or increase) in the rate of
principal prepayments. Furthermore, the effective
yield to holders of interest-bearing Certificates
(other than the Class A-I-7 and Class A-I-8
Certificates) will be slightly lower than the yield
otherwise produced by the applicable Pass-Through
Rate and purchase price because, while interest
generally will accrue on each such Certificate from
the first day of the month, the distribution of
such interest will not be made earlier than the
25th day of the month following the month of
accrual. Moreover, to the extent any Net Interest
Shortfall or the interest portion of any Realized
Loss is allocated to a Class of Certificates the
yield to investors in such Class will be reduced.
Discounts and Premiums. In the case of any Class PO
Certificates or any other Certificates purchased at
a discount, a slower than anticipated rate of
principal payments on the applicable Mortgage Loans
could result in an actual yield that is lower than
the anticipated yield. In the case of any Class A-
I-8 or Class X Certificates or any other
Certificates purchased at a premium, a faster than
anticipated rate of principal payments on the
applicable Mortgage Loans could result in an actual
yield that is lower than the anticipated yield.
Under certain circumstances, investors in the Class
A-I-8 and Class X Certificates could fail to
recover fully their initial investments. A
discount or premium would be determined in relation
to the price at which a Certificate will yield its
Pass-Through Rate, after giving effect to any
payment delay.
Reinvestment Risk. Because the Mortgage Loans may be
prepaid at any time, it is not possible to predict
the rate at which distributions on the Certificates
will be received. Since prevailing interest rates
are subject to fluctuation, there can be no
assurance that investors in the Certificates will
be able to reinvest the distributions thereon at
yields equaling or exceeding the yields on the
Certificates. Yields on any such reinvestments may
be lower, and may even be significantly lower, than
yields on the Certificates. Generally, when
prevailing interest rates increase, prepayment
rates on mortgage loans tend to decrease, resulting
in a reduced rate of return of principal to
investors at a time when reinvestment at such
higher prevailing rates would be desirable.
Conversely, when prevailing interest rates decline,
prepayment rates on mortgage loans tend to
increase, resulting in a greater rate of return of
principal to investors at a time when reinvestment
at comparable yields may not be possible.
Prospective investors in the Certificates should
consider carefully the related
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<PAGE>
reinvestment risks in light of other investments
that may be available to such investors.
Subordination of Certain Classes of Certificates.
The rights of the holders of the Subordinate
Certificates to receive distributions with respect
to each Mortgage Loan will be subordinated to such
rights of the holders of the applicable Senior
Certificates, and to the rights of the holders of
the Subordinate Certificates having a lower
numerical Class designation, in each case, to the
extent described herein. The level of
subordination available as support to the Senior
Certificates will be directly affected by the rate
and timing of prepayments and the occurrence of
Realized Losses.
Between Senior Certificates, on the one hand, and
Subordinate Certificates, on the other, prepayments
on each Mortgage Loan will be allocated solely to
the related Senior Certificates during at least the
first five years after the Closing Date, and then
such allocation will decrease subject to meeting
certain loss and delinquency tests during the next
four years until Senior Certificates and
Subordinate Certificates share pro rata in such
allocations. Consequently, during not less than
the first nine years after the Closing Date,
prepayments will have the effect of accelerating
the amortization of the applicable Senior
Certificates while increasing the percentage
interest in the related Mortgage Loans evidenced by
Subordinate Certificates.
To the extent that Realized Losses are incurred, the
allocation of such Realized Losses to the
Subordinate Certificates will have the effect of
increasing the percentage interest in the Mortgage
Loans, evidenced by the Senior Certificates in the
aggregate. See "Description of the Certificates--
Distributions on the Certificates" and "--
Allocation of Losses; Subordination" herein.
Sequential Pay Senior Certificates. The Class A-I
Certificates (other than the Class A-I-8
Certificates) are subject to various priorities for
payment of principal as described herein.
Distributions on Classes currently entitled to
receive principal payments will be immediately
affected by the prepayment rate of the related
Mortgage Loans at such time. Distributions on
Classes with a later priority of payment will not
be directly affected by the prepayment rate until
such time as principal is distributable on such
Classes. However, the timing of commencement of
principal distributions and the weighted average
lives of such Classes will be affected by the
prepayment rate on the related Mortgage Loans
experienced both before and after the commencement
of principal distributions on such Classes. In
addition, because principal distributions are paid
to certain Classes of Class A-I Certificates (other
than the Class A-I-8 Certificates) before other
Classes of Class A-I Certificates, holders of Class
A-I Certificates that receive principal later bear
a greater risk of being allocated
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Realized Losses than holders of such Classes that
receive principal earlier.
Class PO Certificates. The amounts payable with
respect to the Class PO Certificates generally will
be equal only to the amount of certain principal
payments on the Group I Discount Mortgage Loans.
As a result, the yield on the Class PO Certificates
will be adversely affected by slower than expected
payments of principal (including prepayments,
defaults and liquidations) on the Group I Discount
Mortgage Loans. Because the Group I Discount
Mortgage Loans have lower Net Rates than the Non-
Discount Mortgage Loans in Mortgage Loan Group I,
and because the Mortgage Loans with lower Net Rates
are likely to have lower Mortgage Rates, the Group
I Discount Mortgage Loans are generally likely to
prepay at a slower rate than the Non-Discount
Mortgage Loans. See "Yield and Prepayment
Considerations," especially "--Yield on Class PO
Certificates" herein.
Class X Certificates. Because the Notional Amount of
the Class X Certificates will equal the aggregate
Scheduled Principal Balances of all of the Mortgage
Loans, the yield on the Class X Certificates will
be sensitive to the rate and timing of principal
prepayments on all of the Mortgage Loans. A rapid
rate of principal prepayments on the Mortgage Loans
will have a materially negative effect on the yield
to investors in the Class X Certificates.
Investors should fully consider the associated
risks, including the risk that a rapid rate of
principal prepayments could result in the failure
of investors in the Class X Certificates to recover
fully their initial investments. See "Yield and
Prepayment Considerations--Yield on Class X
Certificates" herein.
Since the Pass-Through Rate applicable to the Class X
Certificates will be based upon the weighted
average of the Net Rates of the Mortgage Loans,
disproportionate prepayments of Mortgage Loans with
higher Net Rates will adversely affect the yield on
the Class X Certificates.
Class A-I-8 Certificates. The yield to investors in
the Class A-I-8 Certificates will be highly
sensitive to the level of LIBOR. A high rate of
principal payments (including prepayments) on the
Mortgage Loans and/or a high level of LIBOR will
have a materially negative effect on the yield to
investors in the Class A-I-8 Certificates.
Investors should fully consider the associated
risks, including the risk that, under certain
circumstances, investors in the Class A-I-8
Certificates could fail to recover fully their
initial investments. See "Yield and Prepayment
Considerations Yield on Class A-I-8 Certificates"
herein.
Residual Certificates. Holders of the Residual
Certificates are entitled to receive distributions
of principal and interest as
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<PAGE>
described herein. However, holders of such
Certificates may have tax liabilities with respect
to their Certificates during the early years of the
related REMIC that substantially exceed the
principal and interest payable thereon during such
periods.
Liquidity................. There is currently no secondary market for the
Certificates, and there can be no assurance that
one will develop. The Underwriter intends to
establish a market in the Classes of Offered
Certificates, but it is not obligated to do so.
There is no assurance that any such market, if
established, will continue. Each Certificateholder
will receive monthly reports pertaining to the
Certificates as described under "The Pooling and
Servicing Agreement--Reports to Certificateholders"
in the Prospectus. There are a limited number of
sources which provide certain information about
mortgage pass-through certificates in the secondary
market, and there can be no assurance that any of
these sources will provide information about the
Certificates. Investors should consider the effect
of limited information on the liquidity of the
Certificates.
Optional Termination...... On any Distribution Date on which the aggregate
unpaid principal balance of the Mortgage Loans is
less than 10% of the aggregate Scheduled Principal
Balance of the Mortgage Loans as of the Cut-off
Date, the Master Servicer or its designee may
repurchase from the Trust all Mortgage Loans
remaining outstanding and any REO Property
remaining in the Trust at the purchase price set
forth in the Agreement. The Trust may also be
terminated and the Certificates retired on any
Distribution Date upon the Master Servicer's
determination, based upon an opinion of counsel,
that the REMIC status of REMIC I or REMIC II (as
defined below) has been lost or that a substantial
risk exists that such status will be lost for the
then current taxable year. Upon termination, the
holders of Certificates (other than the Class A-I-8
and Class X Certificates) will receive the Current
Principal Amount of their Certificates and any
accrued but unpaid interest and the holders of the
Class A-I-8 and Class X Certificates will receive
accrued but unpaid interest on their Certificates.
See "The Pooling and Servicing Agreement--
Termination" herein.
Certain Federal Income Tax
Consequences.............. An election will be made to treat the Mortgage Loans,
the Certificate Account and certain other assets
owned by the Trust as a real estate mortgage
investment conduit ("REMIC II") for federal income
tax purposes. REMIC II will issue "regular
interests" and one "residual interest." An
election will be made to treat the "regular
interests" in REMIC II and certain other assets
owned by the Trust as a REMIC ("REMIC I"). The
Certificates (other than the Class R-1, Class R-2
and Class X Certificates), as well as each of the
Separate Components comprising the Class X
Certificates, will be designated as regular
interests in REMIC I. The Certificates (other than
the Class R-1 and Class R-2 Certificates) and,
where the context so
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<PAGE>
requires, each of the separate components of the
Class X Certificates (in lieu of the Class X
Certificates) are herein referred to as the
"Regular Certificates" or the "REMIC Regular
Certificates." The Class R-2 Certificates will be
designated as the residual interest in REMIC II,
and the Class R-1 Certificates will be designated
as the residual interest in REMIC I (collectively,
the "Residual Certificates" or the "REMIC Residual
Certificates"). See "Federal Income Tax
Considerations" herein and "Certain Federal Income
Tax Consequences" in the Prospectus and
"Restrictions on Purchase and Transfer of the
Residual Certificates" herein.
ERISA Considerations...... Fiduciaries of employee benefit plans subject to
Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consider
the ERISA fiduciary investment standards before
authorizing an investment by a plan in the
Certificates. In addition, fiduciaries of employee
benefit plans or other retirement arrangements
(such as individual retirement accounts or certain
Keogh plans) which are subject to Title I of ERISA,
and/or Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code"), as well as any
entity, including an insurance company general
account, whose underlying assets include plan
assets by reason of a plan or account investing in
such entity (collectively, "Plan(s)"), should
consult with their legal counsel to determine
whether an investment in the Certificates will
cause the assets of the Trust ("Trust Assets") to
be considered plan assets pursuant to the plan
asset regulations set forth in 29 C.F.R. ' 2510.3-
101, thereby subjecting the Plan to the prohibited
transaction rules with respect to the Trust Assets
and the Trustee or the Master Servicer to the
fiduciary investment standards of ERISA, or cause
the excise tax provisions of Section 4975 of the
Code to apply to the Trust Assets, unless some
exemption granted by the Department of Labor
applies to the acquisition, holding or transfer of
the Certificates.
Subject to the considerations set forth under "ERISA
Considerations" herein and in the Prospectus, the
purchase or holding of the Senior Certificates
(other than the Class PO Certificates) by, on
behalf of, or with plan assets of, a Plan may
qualify for exemptive relief under Prohibited
Transaction Exemption 90-30 (the "Exemption").
The Class PO and Class B Certificates generally may
be purchased by, on behalf of, or with plan assets
of, a Plan, if the proposed transferee provides the
Trustee with a satisfactory "Benefit Plan Opinion"
to the effect that a prohibited transaction class
exemption based on the identity of the fiduciary
making the decision to acquire such Certificates on
behalf of the Plan is applicable to the
acquisition, holding and transfer of the Class PO
and Class B Certificates as further described in
"ERISA Considerations" herein.
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<PAGE>
Restrictions on Purchase and
Transfer of the Residual
Certificates.............. The Residual Certificates are not offered for sale to
certain tax exempt organizations that are
"disqualified organizations" as defined in "Certain
Federal Income Tax Consequences--REMIC Residual
Certificates--Tax on Disposition of REMIC Residual
Certificates; Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus. Such
"disqualified organizations" are prohibited from
acquiring or holding any beneficial interest in the
Residual Certificates. Further, neither the
Residual Certificates nor any beneficial interest
therein may be sold or otherwise transferred
without the express written consent of Bankers
Trust Company of California, N.A., acting as the
"Tax Matters Person" (as defined in the Code),
which may be withheld to avoid a risk of REMIC
disqualification or REMIC-level tax. See "Certain
Federal Income Tax Consequences--REMIC Residual
Certificates--Tax on Disposition of REMIC Residual
Certificates; Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus and
"Restrictions on Purchase and Transfer of the
Residual Certificates" herein. Finally, unless the
Tax Matters Person consents in writing (which
consent may be withheld in the Tax Matters Person's
sole discretion), the Residual Certificates
(including a beneficial interest therein) may not
be purchased by or transferred to any person who is
not a "United States person," as such term is
defined in Section 7701(a)(30) of the Code. For
certain additional tax-related restrictions on the
transfer of Residual Certificates, See "Certain
Federal Income Tax Consequences--REMIC Residual
Certificates--Mismatching of Income and Deductions;
Excess Inclusions" and "Certain Federal Income Tax
Consequences--Foreign Investors--REMIC Residual
Certificates" in the Prospectus.
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<PAGE>
Rating.................... It is a condition to their issuance that each Class
of Offered Certificates receives the ratings set
forth below from Standard & Poor's Rating Services,
a division of The McGraw-Hill Companies, Inc.
("S&P") and Fitch Investors Service, L.P.
("Fitch"). S&P and Fitch are referred to herein as
the "Rating Agencies."
Rating
------
Class S&P Fitch
----- --- -----
Class A-I-1 AAA AAA
Class A-I-2 AAA AAA
Class A-I-3 AAA AAA
Class A-I-4 AAA AAA
Class A-I-5 AAA AAA
Class A-I-6 AAA AAA
Class A-I-7 AAA AAA
Class A-I-8 AAAr AAA
Class A-I-9 AAA AAA
Class A-I-10 AAA AAA
Class A-I-11 AAA AAA
Class A-II AAA AAA
Class PO AAAr AAA
Class X AAAr AAA
Class B-1 AA AA
Class B-2 A A
Class B-3 -- BBB
Class R-1 AAA AAA
Class R-2 AAA AAA
The "r" symbol is appended to the rating by S&P of
those Certificates that S&P believes may experience
high volatility or high variability in expected
returns due to non-credit risks. The absence of an
"r" symbol in the ratings of the other Offered
Certificates should not be taken as an indication
that such Certificates will exhibit no volatility
or variability in total return.
The ratings of the Offered Certificates of any Class
should be evaluated independently from similar
ratings on other types of securities. A rating is
not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the Rating Agencies. See
"Ratings" herein.
BSMSI has not requested a rating of the Offered
Certificates by any rating agency other than the
Rating Agencies. However, there can be no
assurance as to whether any other rating agency
will rate the Offered Certificates or, if it does,
what rating would be assigned by such other rating
agency. The rating assigned by such other rating
agency to the Offered Certificates
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<PAGE>
could be lower than the respective ratings assigned
by the Rating Agencies.
Legal Investment.......... The Senior Certificates and the Class B-1
Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") for so
long as they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization, and, as
such, will be legal investments for certain
entities to the extent provided in SMMEA, subject
to state laws overriding SMMEA. Certain states
have enacted legislation overriding the legal
investment provisions of SMMEA. The remaining
Classes of Certificates will not constitute
"mortgage related securities" under SMMEA (the
"Non-SMMEA Certificates"). The appropriate
characterization of the Non-SMMEA Certificates
under various legal investment restrictions, and
thus the ability of investors subject to these
restrictions to purchase Non-SMMEA Certificates,
may be subject to significant interpretive
uncertainties.
All investors whose investment activities are subject
to legal investment laws and regulations or to
review by certain regulatory authorities may be
subject to restrictions on investment in the
Certificates. Any such institution should consult
its own legal advisors in determining whether and
to what extent there may be restrictions on its
ability to invest in the Certificates. See "Legal
Investment" herein and in the Prospectus.
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<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
All of the Mortgage Loans are conventional (neither insured by the Federal
Housing Administration ("FHA") nor guaranteed by the Veterans' Administration
("VA")) fully amortizing, fixed-rate Mortgage Loans secured by first liens on
one- to four-family residential Mortgaged Properties. The aggregate principal
balance of the Mortgage Loans as of the Cut-off Date is referred to as the "Cut-
off Date Scheduled Principal Balance." The Cut-off Date Scheduled Principal
Balance set forth below is subject to a permitted variance of up to 5%. The
following paragraphs and tables contained in Annex A set forth certain
additional information with respect to the Mortgage Loans.*
All of the Mortgage Loans will have been sold to BSMSI by ICI Funding
Corporation ("ICI Funding" or the "Master Servicer"), pursuant to a mortgage
loan purchase agreement among BSMSI, as purchaser, ICI Funding, as seller, and
ICI Funding's parent, Imperial Credit Mortgage Holdings, Inc., as guarantor.
The Mortgage Loans will have been acquired by ICI Funding in accordance with the
underwriting criteria described herein. All of the Mortgage Loans have monthly
payments due on the first day of each month. Each Mortgage Rate will be fixed
for the life of the related Mortgage Loan.
The Cut-off Date Scheduled Principal Balance of all of the Mortgage Loans is
approximately $192,127,480. The Mortgage Loans are divided into Mortgage Loan
Group I and Mortgage Loan Group II, with the Group I Mortgage Loans and Group II
Mortgage Loans having Cut-off Date Scheduled Principal Balances of $172,536,445
and $19,591,034, respectively. All of the Group I Mortgage Loans have Net Rates
lower than or equal to 9.50% per annum and all of the Group II Mortgage Loans
have Net Rates greater than 9.50% per annum. Group I Mortgage Loans with Cut-
off Date Scheduled Principal Balances of approximately $10,448,427 and
$162,088,018 have original terms to stated maturity of up to 15 years, or
greater than 15 but not more than 30 years, respectively, and Group II Mortgage
Loans with Cut-off Date Scheduled Principal Balances of approximately $574,159
and $19,016,875 have original terms to stated maturity of up to 15 years, or
greater than 15 but not more than 30 years, respectively, in each case based
upon the date of origination or any later modification.
Each Mortgage Loan with a Loan-to-Value Ratio at origination in excess of
80% (except for two Group I Mortgage Loan with a Cut-off Date Scheduled
Principal Balance of approximately $487,968 and seven Group II Mortgage Loan
with a Cut-off Date Scheduled Principal Balance of approximately $1,163,623) is
insured by a primary mortgage insurance policy ("Primary Insurance Policy").
Each such Primary Insurance Policy provides coverage in an amount equal at least
to the excess of the original principal balance of the Mortgage Loan covered
thereby, plus accrued interest thereon and related foreclosure expenses over 75%
of the value of the related Mortgaged Property as determined at the time of
origination of the related Mortgage Loan. For these purposes Loan-to-Value
Ratio means the ratio, expressed as a percentage, of the principal balance of
the Mortgage Loan at origination to the original value of the Mortgaged Property
(i.e., the value at origination based upon an appraisal or the selling price,
whichever is less, or in the case of certain refinancings, the value set forth
in an appraisal). There can be no assurance that the Loan-to-Value Ratio of any
Mortgage Loan determined at any time after origination is less than or equal to
its original Loan-to-Value Ratio.
- ----------
* The description herein of the Mortgage Loans is based upon estimates of the
composition of the Mortgage Loans as of the Cut-off Date, as adjusted for all
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Certificates, Mortgage Loans may be removed as a result of (i)
Principal Prepayments thereof in full prior to December 13, 1996, (ii)
requirements of S&P or Fitch or (iii) delinquencies or otherwise. In any such
event, other mortgage loans may be included in the Trust. BSMSI believes that
the estimated information set forth herein with respect to the Mortgage Loans as
presently constituted is representative of the characteristics of the Mortgage
Loans at the time the Certificates are issued, although certain characteristics
of the Mortgage Loans may vary.
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<PAGE>
As of the Cut-off Date, it is expected that two of the Mortgage Loans
representing approximately 0.21% of the aggregate Cut-off Date Scheduled
Principal Balances of all of the Mortgage Loans are Buydown Loans (as
hereinafter defined). Buydown Loans are subject to temporary buydown plans
pursuant to which the monthly payments made by the mortgagor in the early years
of a Buydown Loan will be less than the scheduled monthly payments thereon after
the expiration of the buydown period, the resulting difference to be made-up
from an amount contributed by the mortgagor, the seller of the related Mortgaged
Property, a lender or another party and placed in a custodial account.
None of the Mortgage Loans will be assumable. None of the Mortgage Loans
will be 30 or more days delinquent in payment as of the Closing Date, or will
have been 30 or more days delinquent more than once during the 12 months
preceding the Closing Date.
Pursuant to its terms, each Mortgage Loan is required to be covered by a
standard hazard insurance policy in an amount equal to the lower of the original
principal loan amount or the replacement value of the improvements on the
Mortgaged Property. See "The Pooling and Servicing Agreement--Hazard Insurance"
in the Prospectus.
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at the levels in effect on the date of origination of
the related Mortgage Loan. Approximately 45.62% and 25.29% of the Group I
Mortgage Loans and Group II Mortgage Loans, respectively, (by Cut-off Date
Scheduled Principal Balance) are secured by Mortgaged Properties located in the
State of California. Property values of residential real estate in California
have declined in recent years. If the California residential real estate market
should continue to experience an overall decline in property values after the
dates of origination of the Mortgage Loans, the rates of delinquencies,
foreclosures, bankruptcies and losses on the Mortgage Loans may be expected to
increase substantially.
CHARACTERISTICS OF THE MORTGAGE LOANS
Certain additional expected characteristics (as of the Cut-off Date) of the
Mortgage Loans by Mortgage Loan Group are set forth in the tables appearing as
Annex A to this Prospectus Supplement.
ICI FUNDING
GENERAL
ICI Funding, a California corporation, is a mortgage banking conduit that
acquires conventional one- to four-family residential mortgage loans nationwide.
ICI Funding is a non-consolidating subsidiary of Imperial Credit Mortgage
Holdings, Inc., a publicly traded real estate investment trust. ICI Funding
primarily acquires mortgage loans from approved correspondents.
Prior to November 1995, ICI Funding was a division of Imperial Credit
Industries, Inc. ("ICII"). In November 1995, ICII restructured its operations
pursuant to which ICI Funding became a separate corporation and ICII
contributed, among other things, all of the outstanding nonvoting preferred
stock of ICI Funding, which represents 99% of the economic interest in ICI
Funding, to Imperial Credit Mortgage Holdings, Inc., in exchange for
approximately 10% of Imperial Credit Mortgage Holdings, Inc.'s common stock.
All of the outstanding shares of common stock of ICI Funding were retained by
ICII.
ICI Funding had sub-contracted with ICII to perform its mortgage loan
servicing, which includes the processing and administration of mortgage loan
payments, in return for a sub-servicing fee through June 30, 1996. At March 31,
1996, ICII serviced approximately $1.8 billion outstanding principal amount of
mortgage loans. Subsequently, ICII sold substantially all of its loan servicing
operations. Consequently, commencing on July 1, 1996, Wendover Funding, Inc., a
wholly-owned subsidiary of State Street Bank and Trust Company ("Wendover"),
undertook to perform ICI Funding's mortgage loan servicing for a sub-servicing
fee. At September
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<PAGE>
30, 1996, Wendover serviced approximately $10.267 billion outstanding principal
amount of mortgage loans. Wendover is hereinafter at times referred to herein as
the "Sub-Servicer." See "--The Master Servicer; the Sub-Servicer."
At September 30, 1996, ICI Funding had approximately 97 employees. ICI
Funding's executive offices are located at 20371 Irvine Avenue, Santa Ana
Heights, California 92707, and its telephone number is (714) 556-0122.
UNDERWRITING STANDARDS
All of the Mortgage Loans were acquired by ICI Funding and substantially all
were underwritten pursuant to, or in accordance with, the standards of either
ICI Funding's Progressive Series Program or its Progressive Express Program,
each of which is described below. Annex A to this Prospectus Supplement
contains a table setting forth the percentages of the Mortgage Loans that were
underwritten pursuant to, or in accordance with, the standards of ICI Funding's
Progressive Series Program and its Progressive Express Program, respectively.
The Progressive Series Program
General. The underwriting guidelines utilized in the Progressive Series
Program, as developed by ICI Funding, are intended to assess the borrower's
ability and willingness to repay the mortgage loan obligation and to assess the
adequacy of the mortgaged property as collateral for the mortgage loan. The
Progressive Series Program is designed to meet the needs of borrowers with
excellent credit, as well as those whose credit has been adversely affected.
The Progressive Series Program consists of six mortgage loan programs. Each
program has different credit criteria, reserve requirements, qualifying ratios
and Loan-to-Value Ratio restrictions. Series I is designed for credit history
and income requirements typical of "A" credit borrowers. In the event a
borrower does not fit the Series I criteria, the borrower's mortgage loan is
placed into either Series II, III, III+, IV or V, depending on which series'
mortgage loan parameters meets the borrower's unique credit profile. Series II,
III, III+, IV and V allow for less restrictive standards because of certain
compensating or offsetting factors such as a lower Loan-to-Value Ratio, verified
liquid assets, job stability, pride of ownership and, in the case of refinance
mortgage loans, length of time owning the mortgaged property. The philosophy of
the Progressive Series Program is that no single borrower characteristic should
automatically determine whether an application for a mortgage loan should be
approved or disapproved. Lending decisions are based on a risk analysis
assessment after the review of the entire mortgage loan file. Each mortgage
loan is individually underwritten with emphasis placed on the overall quality of
the mortgage loan. The Progressive Series I Program utilizes an average annual
salary to calculate the debt service-to-income ratio. Salaried borrowers are
evaluated based on a 12 month salary history, and self-employed and commission
borrowers are evaluated on a 24 month basis. The debt service-to-income ratio
for Series I borrowers is required to be within the range of 36% to 50%. The
Progressive Series II, III, III+, IV and V Program borrowers are required to
have debt service-to-income ratios within the range of 45% to 60% calculated on
the basis of monthly income and depending on the Loan-to-Value Ratio of the
Mortgage Loan.
Under the Progressive Series Program, ICI Funding underwrites one- to four-
family mortgage loans with Loan-to-Value Ratios at origination of up to 95%,
depending on, among other things, a borrower's credit history, repayment ability
and debt service-to-income ratio, as well as the type and use of the mortgaged
property. Second lien financing of the mortgaged properties may be provided by
lenders other than ICI Funding at origination; however, the combined Loan-to-
Value Ratio ("CLTV") generally may not exceed 95% for mortgage loan amounts up
to $400,000 and 90% for mortgage loan amounts above $400,000. In certain
circumstances, ICI Funding may allow second lien financing with CLTVs of up to
100%. The mortgage loans in the Progressive Series Program generally bear rates
of interest that are greater than those which are originated in accordance with
FHLMC and FNMA standards. In general, the maximum amount for mortgage loans
originated under the Progressive Series Program is $750,000; however, ICI
Funding may approve mortgage loans in excess of such amount on a case-by-case
basis.
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<PAGE>
All of the mortgage loans originated under the Progressive Series I Program
are underwritten either by employees of ICI Funding or by contracted mortgage
insurance companies or delegated conduit sellers. All mortgage loans originated
under the Series II and III Programs are underwritten by employees of ICI
Funding and/or Commonwealth Mortgage Assurance Company. Substantially all of
the mortgage loans originated under the Series III+, IV and V Programs are
underwritten by employees of ICI Funding. Substantially all of the Series I
Program mortgage loans and all of the Series II and III Program mortgage loans
with Loan-to-Value Ratios at origination in excess of 80% are insured by a
Primary Insurance Policy. None of the Series III+ Program Mortgage Loans with
Loan-to-Value Ratios at origination in excess of 80% will be insured by a
Primary Insurance Policy. In general, all Series IV and Series V Program
Mortgage Loans have Loan-to-Value Ratios at origination which are less than or
equal to 80% and do not require a Primary Insurance Policy. ICI Funding
receives verbal verification from ICI Funding's conduit seller of employment
prior to funding or acquiring each Progressive Series Program mortgage loan.
Full/Alternative Documentation and Reduced Documentation Progressive Series
Programs. Each prospective borrower completes a mortgage loan application which
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. ICI Funding requires a
credit report on each applicant from a credit reporting company. The report
typically contains information relating to credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments.
The Progressive Series Program allows for approval of an application
pursuant to the (a) Full/Alternative Documentation Program, or (b) the Limited
Documentation Program, the Lite Documentation Program, the "No Ratio" Program or
the "No Income, No Assets" Program (any of the foregoing, a "Reduced
Documentation Program"). The Full/Alternative Documentation Program requires
the following documents: (i) Uniform Residential Loan Application (FNMA Form
1003 or FHLMC Form 65), (ii) Statement of Assets and Liabilities (FNMA Form
1003A or FHLMC 65A), (iii) Residential Mortgage Credit Report with records
obtained from at least two separate repositories, (iv) Verification of
Employment Form providing a complete two year employment history, (v)
Verification of Deposit Form for all liquid assets, verifying minimum cash
reserves as required based upon the Loan-to-Value Ratio and borrower's income,
and (vi) a Uniform Residential Appraisal Report (FNMA Form 1004 or FHLMC Form
70). The Full/Alternative Documentation Program allows for the use of certain
alternative documents in lieu of the Verification of Deposit Form and
Verification of Employment Form. These include W-2 Statements, tax returns and
one pay check from the most recent full month for verification of income and the
most recent three months personal bank statements for verification of liquid
assets. In addition, self-employed borrowers must provide federal tax returns
for the previous two to three years, including K-1's, federal business tax
returns for two years, year-to-date financial statements, a business credit
report (for corporations) and a signed IRS Form 4506 (Request for Copy of Tax
Returns).
Under the Limited Documentation Program, which is available to borrowers in
every Progressive Series Program, ICI Funding obtains from prospective borrowers
either a verification of deposits or bank statements for the most recent two-
month period preceding the mortgage loan application. In addition, the Lite
Documentation Program is available to Series III+, Series IV and Series V self-
employed borrowers where the previous 12 months bank statements are utilized in
lieu of tax returns. Under these programs the borrower provides income
information on the mortgage loan application, and the debt service-to-income
ratio is calculated. However, income is not verified. Permitted maximum Loan-
to-Value Ratios (including secondary financing) under the Limited Documentation
and Lite Documentation Programs generally are limited.
The Progressive Series Program also allows for approval of applications
pursuant to the "No Ratio" Program and "No Income, No Assets" Program. The "No
Ratio" Program, available to borrowers in the Series I and Series II Programs,
is designed for a mortgage loan which requires a minimum 20% down payment from
the borrower with employment information, but no income information, stated on
the application (and, therefore, the debt service-to-income ratio is not
calculated). The verification of assets is confirmed by written verification of
deposits and supported by bank statements. With respect to the "No Ratio"
Program, a mortgage loan with a Loan-to-Value Ratio at origination in excess of
80% is not eligible.
S-29
<PAGE>
The "No Income, No Assets" Program, available to borrowers in the Series I
Program, requires a much larger down payment than under the "No Ratio" Program.
Under this program, the borrower provides no income information, but provides
employment and unverified asset information on the mortgage loan application.
With respect to the "No Income, No Assets" Program, a mortgage loan with a Loan-
to-Value Ratio at origination in excess of 70% is generally not eligible.
Under all Progressive Series Programs, ICI Funding's conduit seller verbally
verifies the borrower's employment prior to closing. Credit history, collateral
quality and the amount of the down payment are important factors in evaluating a
mortgage loan submitted under one of the Reduced Documentation Programs. In
addition, in order to qualify for a Reduced Documentation Program, a mortgage
loan must conform to certain criteria regarding maximum loan amount, property
type and occupancy status. Mortgage loans having a Loan-to-Value Ratio at
origination in excess of 80% for Series I, II and III and mortgage loans on
mortgaged property used as a second or vacation home by the prospective
borrowers are not eligible for a Reduced Documentation Program. In general, the
maximum loan amount for mortgage loans underwritten in accordance with Series I,
II and III Reduced Documentation Program is $750,000 for purchase transactions
and rate-term transactions and a maximum loan amount of $650,000 for cash out
refinance transactions. The maximum loan amount for mortgage loans underwritten
in accordance with Series III+, IV and V Reduced Documentation Program is
$450,000. Secondary financing is allowed in the origination of the Limited
Documentation Program but must meet the CLTV requirements described above and
certain other requirements for subordinate financing. Secondary financing is
not allowed in the case of the "No Ratio" or the "No Income, No Assets"
Programs. In all cases, liquid assets must support the level of income of the
borrower as stated in proportion to the type of employment of the borrower.
Full Documentation is requested by the underwriter if it is the judgment of the
underwriter that the compensating factors are insufficient for loan approval.
Credit History. The Progressive Series Program defines an acceptable credit
history in each of the Series I, II and III Programs. The Series I Program
defines an acceptable credit history as a borrower who has "A" credit, meaning a
minimum of five trade accounts, with 24 months credit history, no 30-day
delinquent mortgage payments in the last 24 months, and a maximum of two 30-day
delinquent payments on any installment credit account within the past 24 months.
No bankruptcies or foreclosures are allowed in the past 24 months. No
judgments, suits, liens, collections or charge-offs are allowed within the past
24 months.
With respect to the Series II Program, a borrower must have a minimum of
five trade accounts with no late mortgage payments for the past 12 months and
may have one 30-day delinquent mortgage payment within the past 13th through
24th months. A borrower may not have more than three 30-day delinquent payments
on any revolving credit account and a maximum of three 30-day delinquent
payments within the past 24 months on any installment credit account. All
bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established a satisfactory credit history. Foreclosures are not
allowed in the past 24 months.
With respect to the Series III Program, a borrower may not have more than
two 30-day delinquent mortgage payments within the past 24 months. The borrower
may not have more than three 30-day delinquent payments and one 60-day
delinquent payment on revolving debt in the last 24 months and may not have more
than three 30-day delinquent and one 60-day delinquent payment on any
installment credit account in the past 24 months. Any open judgment, suit,
lien, collection or charge-off must be paid prior to closing. Bankruptcies must
be at least 24 months old, fully discharged and the borrower must have re-
established a satisfactory credit history. No late mortgage payments are
permitted on equity take-out refinances under the Limited Documentation Program
offered under the Progressive Series Program.
With respect to the Series III+ Program, a borrower may not have more than
two 30-day delinquent mortgage payments within the past 12 months. The borrower
may not have more than two 30-day delinquent payments and one 60-day delinquent
payment on revolving debt in the last 12 months and may not have more than two
30-day delinquent payments and one 60-day delinquent payment on any installment
credit account in the past 12 months. Any open judgments, suits, liens,
collections, charge-offs not to exceed $500 must be paid in full at closing.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established a satisfactory credit history. Foreclosures are not
allowed in the past 24 months.
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<PAGE>
With respect to the Series IV Program, a borrower may not have more than
four 30-day delinquent mortgage payments or three 30-day delinquent mortgage
payments and one 60-day delinquent mortgage payment within the past 12 months.
The borrower may not have more than four 30-day delinquent payments or two 60-
day delinquent payments or one 90-day delinquent payment on revolving debt in
the last 12 months and may not have more than four 30-day delinquent payments or
two 60-day delinquent payments or one 90-day delinquent payment on any
installment credit account in the past 12 months. Any open judgments, suits,
liens, collections, charge-offs not to exceed $1,000 must be paid in full at
closing. Bankruptcies must be at least 18 months old, fully discharged and the
borrower must have re-established a satisfactory credit history. Foreclosures
are not allowed in the past 18 months.
With respect to the Series V Program, a borrower may not have more than five
30-day delinquent mortgage payments or two 60-day delinquent mortgage payments
and one 90-day delinquent mortgage payment within the past 12 months. The
borrower may not have more than six 30-day delinquent payments or three 60-day
delinquent payments or two 90-day delinquent payments on revolving debt in the
last 12 months and may not have more than six 30-day delinquent payments or
three 60-day delinquent payments or two 90-day delinquent payments on any
installment credit account in the past 12 months. Any open judgments, suits,
liens, collections or charge-offs not to exceed $4,000 must be paid in full at
closing. Bankruptcies must be at least 12 months old, fully discharged and the
borrower must have re-established a satisfactory credit history. Foreclosures
are not allowed in the past 12 months.
Quality Control. ICI Funding generally performs a pre-funding audit on each
Progressive Series Program mortgage loan. This audit includes a review for
compliance with Progressive Series Program parameters and accuracy of the legal
documents. ICI Funding performs a quality control review on a minimum of 25% of
the mortgage loans originated or acquired under the Progressive Series Program
for complete re-verification of employment, income and liquid assets used to
qualify for such mortgage loan. Such review also includes procedures intended
to detect evidence of fraudulent documentation and/or imprudent activity during
the processing, funding, servicing or selling of the mortgage loan.
Verification of occupancy and applicable information is made by regular mail.
Appraisals. One- to four-family residential properties that are to secure
Progressive Series Program mortgage loans are appraised by qualified independent
appraisers who are approved by ICI Funding's correspondents. Such appraisers
inspect and appraise the subject property and verify that such property is in
acceptable condition. Following each appraisal, the appraiser prepares a report
which includes a market value analysis based on recent sales of comparable homes
in the area and, when deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home. All appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice adopted by
the Appraisal Standards Board of the Appraisal Foundation and must be on forms
acceptable to FNMA and FHLMC. As part of ICI Funding's quality control
procedures, either field or desk appraisal reviews are obtained on 10% of all
mortgage loans originated under the Progressive Series Program. Selected
mortgage loans will also be reviewed for compliance and document accuracy. Desk
and/or field appraisal reviews are required on all mortgage loans originated
under the Progressive Series Program with Loan-to-Value Ratios in excess of 65%
on mortgaged properties located in the State of California, Loan-to-Value Ratios
in excess of 70% on any properties in all other states, loan amounts in excess
of $350,000, non-owner occupied properties, second home properties, cash-out
refinance mortgage loans and whenever in the underwriter's judgment it is
necessary to reverify the appraised value of the property.
Variations. ICI Funding uses the foregoing parameters as guidelines only.
On a case-by-case basis, ICI Funding may determine that the prospective
mortgagor warrants an exception outside the standard Progressive Series Program
guidelines. An exception may be allowed if the loan application reflects
certain compensating factors, including (i) the prospective mortgagor has
demonstrated an ability to save and devote a greater portion of income to basic
housing needs; (ii) the prospective mortgagor may have a potential for increased
earnings and advancement because of education or special job training, even if
the prospective mortgagor has just entered the job market; (iii) the prospective
mortgagor has demonstrated an ability to maintain a debt free position; (iv) the
prospective mortgagor may have short term income that is verifiable but could
not be counted as stable income
S-31
<PAGE>
because it does not meet the remaining term requirements; and (v) the
prospective mortgagor's net worth is substantial enough to suggest that
repayment of the loan is within the prospective mortgagor's ability.
The Progressive Express Program
General. In July 1996, ICI Funding developed an additional Series to the
Progressive Program, the "Progressive Express Program". The concept of the
Progressive Express Program is to underwrite the loan focusing on the borrowers
Fair Issac (FICO) credit score, ability and willingness to repay the mortgage
loan obligation, and assess the adequacy of the mortgage property as collateral
for the loan. The FICO Score was developed by Fair, Issac Co., Inc. of San
Rafael, California. It is an electronic evaluation of past and present credit
accounts on the borrower's credit bureau report. This includes all reported
accounts as well as public records and inquiries. The Progressive Express
Program offers six levels of mortgage loan programs. The Progressive Express
Program has a minimum FICO score that must be met by each of the borrowers and
does not allow for any exceptions to the FICO score requirement. The FICO Score
requirement is as follows: Progressive Express I 681 & above, Progressive
Express II 680-621, Progressive Express III 620-601, Progressive Express IV 600-
581, Progressive Express V 580-551, and Progressive Express VI 550-500. Each
Progressive Express program has different FICO score requirements, credit
criteria, reserve requirements, and Loan-to-Value Ratio restrictions.
Progressive Express I is designed for credit history and income requirements
typical of "A+" credit borrowers. In the event a borrower does not fit the
Progressive Express I criteria, the borrower's mortgage loan is placed into
either Progressive Express II, III, IV, V, or VI, depending on which series'
mortgage loan parameters meets the borrower unique credit profile.
Under the Progressive Express Program, ICI Funding underwrites single
family dwellings with Loan-to-Value Ratios at origination of up to 95%. In
order for the property to be eligible for the Progressive Express Program, it
must be a single family residence (1 unit only), condominium, and/or planned
unit development (PUD). Each mortgage loan is individually underwritten by an
ICI Funding employee or by contracted Commonwealth Mortgage Assurance Company
staff on-site at ICI Funding. This program is not offered to Conduit Sellers
under their Delegated Underwriting program. Progressive Express Programs I
through IV with Loan-to-Value Ratios at origination in excess of 80% are insured
by Commonwealth Mortgage Assurance Company. Loan-to-Value Ratios of 80.01% to
85% require 22% mortgage insurance coverage and 85.01% to 90% require 30%
mortgage insurance coverage.
Each respective buyer completes a Progressive Express Doc loan application
and certifies the following when signing the application; property is intended
to be owner-occupied, funds are not from a gift, borrower is presently employed,
and the transaction is not a non-arms length transaction. At the time of
signing loan documents, Progress Express I - IV borrowers execute a "Borrower's
Certification" certifying the above and that the borrower has 4 months
principal, interest, taxes, and insurance reserves available, exclusive of cash-
out proceeds. The borrower must disclose employment and assets on the
application, however, there is no verification of the information. The Conduit
Seller obtains a Verbal Verification of Employment on each borrower. ICI
Funding uses the foregoing parameters as guidelines only. Sellers may include
certain criteria that ICI Funding may not enforce, particularly, when a fixed
rate loan includes an Addendum to the Note for a prepayment penalty. Full
documentation is requested by the underwriter if it is the judgment of the
underwriter that the compensating factors are insufficient for loan approval
under the Progressive Product Line.
Credit History. The Progressive Express Program defines an acceptable
credit history in each of the programs I through VI. Progressive Express I
defines an acceptable credit history as a borrower who has "A+" credit, meaning
a minimum of 5 trade accounts, no 30-day delinquent mortgage payments in the
past 24 months, and a maximum of two 30-day delinquent payments on any revolving
credit accounts within the past 24 months and one 30-day delinquent payment on
any installment credit accounts within the past 24 months. All bankruptcies
must be at least 24 months old, fully discharged and the borrower must have re-
established a satisfactory credit history. Foreclosures are not allowed in the
past 3 years. No judgments, suits, liens, collections or charge-offs are
allowed within the past 24 months. Tax liens are not allowed.
S-32
<PAGE>
With respect to Progressive Express II, a borrower must have a minimum of 5
trade accounts, no late mortgage payments for the past 12 months, and a maximum
of two 30-day or no 60-day delinquent payments on any revolving credit accounts
and a maximum of one 30-day or no 60-day delinquent payments on any installment
credit accounts in the past 12 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
Judgments, suits, liens, collections or charge-offs must be paid prior to
closing. Tax liens are not allowed.
With respect to Progressive Express III, a borrower must have a minimum of
5 trade accounts, no late mortgage payments for the past 12 months and may have
one 30-day late mortgage payment within the past 13/th/ and 24/th/ months. A
borrower may not have more than a maximum of three 30-day delinquent payments on
any revolving credit accounts or installment credit accounts in the past 24
months. All bankruptcies must be at least 24 months old, fully discharged and
the borrower must have re-established a satisfactory credit history.
Foreclosures are not allowed in the past 3 years. Judgments, suits, liens,
collections or charge-offs must be paid prior to closing. Tax liens are not
allowed.
With respect to Progressive Express IV, a borrower must have a minimum of 5
trade accounts, no more than two 30-day late mortgage payments in the past 12
months or three 30-day late mortgage payments in the past 24 months. A borrower
may not have more than a maximum of three 30-day or one 60-day delinquent
payments on any revolving credit accounts or installment credit accounts in the
past 24 months. All bankruptcies must be at least 24 months old, fully
discharged and the borrower must have re-established a satisfactory credit
history. Foreclosures are not allowed in the past 3 years. Judgments, suits,
liens, collections or charge-offs, not to exceed $500, must be paid prior to
closing. Tax liens are not allowed.
With respect to Progressive Express V, a borrower must have a minimum of 3
trade accounts, no more than two 30-day late mortgage payments in the past 12
months. A borrower may not have more than a maximum of two 30-day or one 60-day
delinquent payments on any revolving credit accounts or installment credit
accounts in the past 12 months. All bankruptcies must be at least 24 months
old, fully discharged and the borrower must have re-established a satisfactory
credit history. Foreclosures are not allowed in the past 24 months. Judgments,
suits, liens, collections or charge-offs, not to exceed $500, must be paid at
closing. Tax liens are not allowed.
With respect to Progressive Express VI, a borrower must have a minimum of 3
trade accounts, no more than four 30-day or three 30-day and one 60-day late
mortgage payments in the past 12 months. A borrower may not have more than a
maximum of four 30-day or two 60-day or one 90-day delinquent payments on any
revolving credit accounts or installment credit accounts in the past 12 months.
All bankruptcies must be at least 18 months old and fully discharged.
Foreclosures are not allowed in the past 18 months. Judgments, suits, liens,
collections or charge-offs, not to exceed $1,000, must be paid at closing. Tax
liens are not allowed.
Quality Control. ICI Funding generally performs a pre-funding audit on each
Progressive Express Program mortgage loan. This audit includes a review for
compliance with Progressive Express Program parameters and accuracy of the legal
documents. ICI Funding performs a quality control review on a minimum of 25% of
the mortgage loans originated or acquired under the Progressive Express Program
for complete re-verification of employment, income and liquid assets used to
qualify for such mortgage loan. Such review also includes procedures intended
to detect evidence of fraudulent documentation and/or imprudent activity during
the processing, funding, servicing or selling of the mortgage loan.
Verification of occupancy and applicable information is made by regular mail.
Appraisals. Each Progressive Express loan includes one full appraisal and
an enhanced review appraisal by a national appraisal company designated by ICI
Funding. The enhanced appraisal review is not required when the full appraisal
is ordered by the Conduit Seller from one of ICI Funding's approved national
appraisal companies. In full appraisals, appraisers inspect and appraise the
subject property and verify that such property is in acceptable condition.
Following each appraisal, the appraiser prepares a report which includes a
market value analysis based on recent sales of comparable homes in the area and,
when deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. All full appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice adopted by the Appraisal
Standards Board of the
S-33
<PAGE>
Appraisal Foundation and must be on forms acceptable to FNMA and FHLMC.
Selected mortgage loans will also be reviewed for compliance and document
accuracy.
ICI Funding commenced acquiring mortgage loans underwritten pursuant to the
Progressive Series Program in November 1995 and pursuant to the Progressive
Express Program in late 1996. Accordingly, ICI Funding does not have any
historical delinquency or default experience that may be referred to for
purposes of estimating the future delinquency and loss experience of the
Mortgage Loans underwritten pursuant to the Progressive Series Program and the
Progressive Express Program. There can be no assurance that the delinquency
experience of the servicing portfolio of ICII or of Wendover as described herein
will correspond to the delinquency experience of the Mortgage Loans underwritten
pursuant to the Progressive Series Program or the Progressive Express Program.
It is contemplated that all of the Progressive Series Program and Progressive
Express Program mortgage loans originated or acquired by ICI Funding will also
be underwritten with a view toward the resale thereof in the secondary mortgage
market.
THE MASTER SERVICER; THE SUB-SERVICER
ICI Funding (in its capacity as master servicer, the "Master Servicer") will
act as master servicer for the Mortgage Loans pursuant to the Agreement. As set
forth above, Wendover will sub-service the Mortgage Loans in exchange for a sub-
servicing fee. See "ICI Funding--General."
Certain information is set forth below with respect to ICII and its
portfolio even though it no longer services the Mortgage Loans. Its portfolio as
shown may be more relevant to the Mortgage Loans than that of Wendover.
ICII. The following table sets forth certain delinquency experience
including pending foreclosures on residential mortgage loans originated or
acquired as part of ICII's former mortgage banking operations (exclusive of
mortgage loans held for sale or investment) and included in ICII's servicing
portfolio at the dates indicated. As of December 31, 1993, 1994 and 1995 and
March 31, 1996, the total principal balance of loans being serviced by ICII was
(in millions) $3,887.0, $4,894.8, $4,532.3 and $1,814.6, respectively.
Information is not provided for periods after March 31, 1996 as a result of the
subsequent sale by ICII of its loan servicing operations.
S-34
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1993 1994/1/ 1995/1/ At March 31, 1996
-------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- --------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 28,641 100% 33,504 100% 34,188 100% 9,586 100%
====== ==== ====== ==== ====== ==== ===== ====
Period of Delinquency:
30-59 days......... 246 1.4% 580 2.5% 979 3.1% 363 4.3%
60-89 days......... 55 0.3% 115 0.6% 193 0.7% 99 1.3%
90 days or more.... 82 0.6% 167 0.9% 223 0.8% 270/2/ 4.3%/2/
---- ----- ---- ----- ---- ----- ---- ----
Total Delinquencies
(excluding Foreclosures) 383 2.3% 862 4.0% 1,395 4.6% 732/2/ 9.8%/2/
==== ===== ==== ===== ===== ===== ==== ====
Foreclosures Pending 22 0.1% 199 1.2% 381 1.5% N/A N/A
</TABLE>
____________________
1 The increase in delinquency rate during 1994 and 1995 was primarily
the result of the purchase of $1.0 billion of servicing rights from
the Resolution Trust Corporation ("RTC") in January 1994 with a higher
delinquency rate than the remainder of ICII's residential servicing
portfolio of loans originated or acquired as part of ICII's former
mortgage banking operations. Excluding the acquisition of these
servicing rights, the delinquency rate at December 31, 1994 and 1995
and March 31, 1996 would have been 3.2%, 5.4% and 8.1%, respectively.
The delinquency rate on the acquired portfolio was 12.5%, 74.8% and
72.1% at December 31, 1994 and 1995 and March 31, 1996, respectively.
(A majority of the RTC servicing rights were sold in 1995. The Company
retained the RTC servicing related to loans that were delinquent 60
days and over.)
2 Includes pending foreclosures
Wendover. Wendover is a subservicer of residential, consumer and commercial
mortgage loans in 50 states. Additionally, Wendover provides contract master
servicing for residential mortgage loans, origination and servicing for Federal
Housing Authority home equity conversion mortgages, specialized asset management
and default servicing for non-performing product, and special servicing
activities for government entities. As of September 30, 1996, Wendover employed
411 employees. Wendover is located in Greensboro, North Carolina. Wendover is an
approved servicer in good standing with FNMA and FHLMC.
Established in 1986, Wendover was originally owned by Sunbelt Savings FSB,
which was formed to receive the assets and certain liabilities of Independent
American Mortgage Services Inc. ("IAMSI") and other insolvent Texas savings and
loan associations. Wendover was a subsidiary of IAMSI until it was purchased by
Wendover Financial Services Corp. in June 1990. In October 1992, Wendover was
acquired by State Street Bank and Trust Company.
The following table sets forth certain information concerning delinquency
experience including bankruptcies and foreclosures in progress on one- to four-
family residential mortgage, consumer, and commercial loans included in
Wendover's servicing portfolio at the dates indicated. Consumer and commercial
loans represented less than 3% of the overall portfolio volume at September 30,
1996. As at December 31, 1993, 1994 and 1995, and September 30, 1996, the total
principal balance of loans being serviced by Wendover was (in millions)
$4,785.6, $7,160.8, $7,637.4 and $10,267, respectively. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage, consumer, or commercial loan is considered delinquent for these
purposes until it is one month past due on a contractual basis.
S-35
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1993 1994/1/ 1995/1/ At September 30, 1996
-------------------- -------------------- -------------------- -----------------------
Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- --------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio/1/ 78,372 100% 96,270 100% 94,662 100% 120,685 100%
====== ===== ====== ===== ======= ===== ======= =====
Period of Delinquency:
30-59 days......... 2,778 2.85% 4,093 4.73% 5,364 6.10% 5,564 4.61%
60-89 days......... 679 0.66% 1,162 1.39% 1,291 1.46% 1,463 1.21%
90 days or more.... 8,694 5.67% 10,082 5.98% 8,409 7.31% 6,545 5.42%
------ ----- ------ ----- ------- ----- ------- ------
Total Delinquencies
(excluding Foreclosures)
12,151 9.18% 15,337 12.10% 15,064 14.87% 13,572 11.25%
====== ===== ====== ====== ======= ====== ======= ======
Foreclosures Pending 1,962 3.70% 1,632 2.28% 4,041 4.86% 4,150 3.44%
</TABLE>
___________________
1 Includes purchased mortgage servicing rights owned by Wendover totaling
6,332 loans for $614.9 million unpaid principal balance and 8,382 loans for
$823.4 million unpaid principal balance as of December 31, 1995 and
September 30, 1996, respectively.
Wendover subservices for a variety of clients with portfolios that include
sub-performing and non-performing loans. In 1995 Wendover added several new
clients with an inordinate amount of loans that were severely delinquent, in
foreclosure, bankruptcy or the post-foreclosure claim process. Clients with
special needs or those with "B" or "C" quality portfolios are assigned to
Wendover's Asset Management Division. Such division handles approximately 400
delinquent loans per employee and is responsible for the collection, workout,
foreclosure, bankruptcy or REO management of each account in their respective
portfolios. Standards for these portfolios typically require intensive
collection activity which include collection contacts early and often,
innovative workout programs and fast track foreclosure processing where
appropriate.
General. There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans will correspond to the delinquency and
foreclosure experience of the servicing portfolio of either ICII or Wendover set
forth in the foregoing tables. The statistics shown above represent the
respective delinquency and foreclosure experiences only at the dates presented,
whereas the aggregate delinquency and foreclosure experience on the Mortgage
Loans will depend on the results obtained over the life of the Trust. Each
servicing portfolio includes mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans.
In addition, Wendover's servicing portfolio includes consumer and commercial
loans. Each servicing portfolio includes mortgage loans underwritten pursuant
to guidelines not necessarily representative of those applicable to the Mortgage
Loans. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by ICII or Wendover. In addition, adverse economic conditions may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Loans.
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the Certificates do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the Prospectus and the provisions of the Agreement
relating to the Certificates offered hereby.
S-36
<PAGE>
General
The Mortgage Pass-Through Certificates, Series 1996-9 (the "Certificates")
will consist of the classes of Certificates offered hereby (the "Offered
Certificates") in addition to the Class B-4, Class B-5 and Class B-6
Certificates (the "Other Certificates"), which are not being offered hereby.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in the Trust. The Trust will consist of (i) the Mortgage
Loans, (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the account (the "Protected Account")
established by the Master Servicer for the collection of payments on the
Mortgage Loans and in the Certificate Account and belonging to the Trust, (iii)
property acquired by foreclosure of such Mortgage Loans or by deed in lieu of
foreclosure; (iv) any applicable Primary Insurance Policies and standard hazard
insurance policies; and (v) all proceeds of the foregoing.
Each Class of Book-Entry Certificates will be represented initially by a
single certificate registered in the name of Cede & Co. ("Cede") as the nominee
of The Depository Trust Company ("DTC"), and beneficial interests will be held
by investors in minimum denominations of $25,000 (except $500,000 and $1,000,000
for the Class A-I-8 and Class X Certificates, respectively) and in each case
increments of $1 in excess thereof. One Certificate of each such Class may be
issued in a different principal amount to accommodate the remainder of the
initial principal amount of the Certificates of such Class. No person acquiring
an interest in the Book-Entry Certificates (a "Certificate Owner") will be
entitled to receive a certificate representing such person's interest in the
Trust, except in the event Definitive Certificates are issued under the limited
circumstances set forth below under "--Definitive Certificates." Unless and
until Definitive Certificates are issued, all references to actions by holders
of Book-Entry Certificates shall refer to actions taken by DTC upon instructions
from its Participants (as defined below), and all references herein to
distributions, notices, reports and statements to holders of Book-Entry
Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Certificates, as the
case may be, for distribution to Certificate Owners in accordance with DTC
procedures.
The Class R-1 and Class R-2 Certificates will be issued in certificated
fully-registered form in a single certificate in a denomination of $100 each.
Distributions of principal and interest as set forth below initially will be
made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to the holders of the Physical Certificates. Upon the
issuance of Definitive Certificates to persons other than Cede, distributions
will be made by the Trustee to the persons in whose names such Certificates are
registered at the close of business on each Record Date, which will be the last
Business Day (as defined below) of the month preceding the month in which the
related Distribution Date occurs. Such distributions will be made (i) by check
mailed to each Certificateholder entitled thereto at the address appearing in
the Certificate Register to be maintained in accordance with the provisions of
the Agreement or (ii) upon timely receipt by the Trustee of written instructions
from a Certificateholder holding Certificates representing an initial aggregate
Current Principal Amount or Notional Amount of not less than $1,000,000, by wire
transfer to a United States dollar account maintained by the payee at any United
States depository institution with appropriate facilities for receiving such a
wire transfer, provided, however, that the final payment in respect of each
Class of Certificates will be made only upon presentation and surrender of such
respective Certificates at the office or agency of the Trustee specified in the
notice to Certificateholders of such final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday or a
day on which the New York Stock Exchange is closed or on which banking
institutions in New York City or California are authorized or obligated by law
or executive order to be closed.
Book-Entry Registration
DTC is a limited purpose trust company organized under the laws of the State
of New York and is a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934. DTC was created to hold
S-37
<PAGE>
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers (including Bear, Stearns & Co. Inc.), banks, trust companies and
clearing corporations. Indirect access to the DTC system also is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal and interest on the Book-Entry Certificates through Participants.
Under a book-entry format, Certificate Owners may experience some delay in their
receipt of payments, since such payments will be forwarded to Cede, as nominee
for DTC. DTC will forward such payments to its Participants, which thereafter
will forward them to Indirect Participants or Certificate Owners. It is
anticipated that, except as provided below under "--Definitive Certificates,"
the only "Certificateholder" with respect to the Book-Entry Certificates will be
Cede, as nominee for DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders, as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC will be required to make book-entry transfers
of Book-Entry Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, Book-Entry Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess physical certificates, the Rules provide a mechanism by which
Participants and Certificate Owners will receive payments and will be able to
transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the ability of
a Certificate Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the DTC system, or to otherwise act with respect to
such Book-Entry Certificates, may be limited due to the absence of physical
certificates for such Book-Entry Certificates.
DTC has advised BSMSI that it will take any action permitted to be taken by
a holder of Book-Entry Certificates under the Agreement only at the direction of
one or more Participants to whose accounts with DTC the Book-Entry Certificates
are credited. Additionally, DTC has advised BSMSI that it will take such action
where the consent of specified percentages of the Book-Entry Certificates is
required under the Agreement only at the direction of and on behalf of
Participants whose interests represent such specified percentages. DTC may take
conflicting actions on behalf of other Participants.
Neither BSMSI, the Master Servicer nor the Trustee will have any liability
for any aspect of the records relating to or payment made on account of
beneficial ownership interests of the Book-Entry Certificates held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Definitive Certificates
Except for the Physical Certificates, the Offered Certificates will be
issued in fully registered, certificated form ("Definitive Certificates") to
Certificate Owners or their nominees, rather than to DTC or its nominee, only if
(i) BSMSI advises the Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
Certificates and BSMSI is unable to locate a qualified successor within 30 days
or (ii) BSMSI, at its option, elects to terminate the book-entry system through
DTC.
Upon the occurrence of either event described in clause (i) or (ii) of the
immediately preceding paragraph, the Trustee is required to notify DTC, which in
turn will notify all Certificate Owners through Participants, of the
availability of Definitive Certificates. Upon surrender by Cede, as nominee of
DTC, of the Definitive Certificates representing the Book-Entry Certificates and
receipt of instructions for reregistration, the Trustee will reissue the Book-
Entry Certificates as
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Definitive Certificates to Certificate Owners. Under no circumstances will
Definitive Certificates of any Class be issued in an amount representing an
interest in, as of the Cut-off Date, less than $25,000 principal amount of the
respective Class of Book-Entry Certificate.
Physical Certificates and Definitive Certificates will be transferable and
exchangeable on a "Certificate Register" to be maintained by the Trustee at the
office or agency of the Trustee maintained for that purpose in Irvine,
California. Physical Certificates and Definitive Certificates surrendered to
the Trustee for registration of transfer or exchange must be accompanied by a
written instrument of transfer in form satisfactory to the Trustee. No service
charge will be made for any registration of transfer or exchange of Physical
Certificates and Definitive Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required. Such office or
agency of the Trustee is currently located at 3 Park Plaza, Irvine, CA 92714.
Available Funds
Available funds for any Distribution Date will be determined separately with
respect to each Mortgage Loan Group ("Group I Available Funds" and "Group II
Available Funds," respectively,) and in each case will be an amount equal to the
aggregate of the following with respect to the related Mortgage Loans: (a) all
previously undistributed payments on account of principal (including the
principal portion of Monthly Payments, Principal Prepayments and the principal
amount of Liquidation Proceeds) and all previously undistributed payments on
account of interest received after the Cut-off Date and on or prior to the
related Determination Date, (b) any Monthly Advances (including Certificate
Account Advances, as defined under "The Pooling and Servicing Agreement--Monthly
Advances" herein) and Compensating Interest Payments (as defined under "The
Pooling and Servicing Agreement--Servicing Compensation and Payment of Expenses"
herein) by the Master Servicer and (c) any amount reimbursed by the Master
Servicer in connection with losses on certain eligible investments, except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all Principal Prepayments and Liquidation Proceeds received after the
applicable Prepayment Period and all related payments of interest;
(iii) all payments, other than Principal Prepayments, that represent early
receipt of scheduled payments due on a date or dates subsequent to the Due Date
in the month in which such Distribution Date occurs;
(iv) amounts received on particular Mortgage Loans as late payments of
principal or interest and respecting which, and to the extent that, there are
any unreimbursed Monthly Advances or Certificate Account Advances;
(v) amounts of Monthly Advances or Certificate Account Advances determined
to be nonrecoverable;
(vi) amounts of Trustee's Fees for such Distribution Date; and
(vii) amounts permitted to be withdrawn from the Certificate Account
pursuant to clauses (i) through (xi) described under the caption "The Pooling
and Servicing Agreement--Certificate Account" herein.
"Available Funds" for any Distribution Date will equal the sum of the Group I
Available Funds and the Group II Available Funds.
Distributions on the Certificates
Allocation of Available Funds. Interest and principal on the Certificates
will be distributed monthly on each Distribution Date, commencing in January
1997, in an aggregate amount equal to the Available Funds for such Distribution
Date.
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(A) On each Distribution Date on or prior to the Distribution Date on which
the Current Principal Amounts of the Subordinate Certificates are reduced to
zero (the "Cross-Over Date"), an amount equal to the Group I Available Funds
will be distributed in the following order of priority among the Certificates:
first, to the interest-bearing Class A-I Certificates, the Residual
Certificates and Component I of the Class X Certificates, the Accrued
Certificate Interest on each such Class and the Class X Component I Accrued
Certificate Interest on such Component for such Distribution Date;
second, to the interest-bearing Class A-I Certificates, the Residual
Certificates and Component I of the Class X Certificates, any Accrued
Certificate Interest and Class X Component I Accrued Certificate Interest
thereon remaining undistributed from previous Distribution Dates, to the extent
of remaining Group I Available Funds, any shortfall in available amounts being
allocated among such Classes and Component in proportion to the amount of such
Accrued Certificate Interest and Class X Component I Accrued Certificate
Interest remaining undistributed for each such Class or Component for such
Distribution Date;
third, to the Class A-I Certificates (other than the Class A-I-8
Certificates), the Residual Certificates and the Class PO Certificates in
reduction of the Current Principal Amounts thereof:
(a) the Group I Senior Optimal Principal Amount (as defined herein), in the
following order of priority:
(i) to the Class A-I-11 Certificates, up to the Class A-I-11 Optimal
Principal Amount (as defined herein) for such Distribution Date, until the
Current Principal Amount thereof has been reduced to zero;
(ii) concurrently, to the Class R-1 and Class R-2 Certificates, pro
rata, based upon their Current Principal Amounts, until the respective Current
Principal Amounts thereof have been reduced to zero;
(iii) 46.12874385%, 47.36700939% and 6.50424676% concurrently to the
Class A-I-1 Certificates, the Class A-I-7 Certificates and Class A-I-2
Certificates, until the Current Principal Amount of the Class A-I-1 Certificates
has been reduced to zero;
(iv) 48.88073066%, 47.36747851% and 3.75179083% concurrently to the
Class A-I-3 Certificates, the Class A-I-7 Certificates and Class A-I-2
Certificates, until the Current Principal Amount of the Class A-I-3 Certificates
has been reduced to zero;
(v) 51.31758879%, 47.36667036% and 1.31574085% concurrently to the
Class A-I-4 Certificates, the Class A-I-7 Certificates and the Class A-I-2
Certificates, until the respective Current Principal Amounts of the Class A-I-4
Certificates and the Class A-I-2 Certificates have been reduced to zero;
(vi) 52.63191233% and 47.36808767% concurrently to the Class A-I-5
Certificates and the Class A-I-7 Certificates, until the Current Principal
Amount of the Class A-I-5 Certificates has been reduced to zero;
(vii) 52.63289452% and 47.36710548% concurrently to the Class A-I-6
Certificates and Class A-I-7 Certificates, until the Current Principal Amount of
the Class A-I-6 Certificates has been reduced to zero;
(viii) concurrently to the Class A-I-9 Certificates and the Class A-I-7
Certificates, pro rata, based on their Current Principal Amounts, until the
Current Principal Amounts thereof have been reduced to zero;
(ix) to the Class A-I-10 Certificates, until the Current Principal
Amount thereof has been reduced to zero; and
(b) the Class PO Principal Distribution Amount (as defined herein) for such
Distribution Date, to the Class PO Certificates, until the Current Principal
Amount thereof has been reduced to zero; and
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fourth, the Class PO Deferred Amount for such Distribution Date to the Class
PO Certificates; provided, that (i) on any Distribution Date, distributions
pursuant to this priority (A) fourth, shall not exceed the excess, if any, of
(x) the Available Funds remaining after giving effect to distributions pursuant
to priorities (A) first through third above and (B) first through third below
over (y) the amount of Accrued Certificate Interest for such Distribution Date
and Accrued Certificate Interest remaining undistributed from previous
Distribution Dates on all Classes of Subordinate Certificates then outstanding,
(ii) such distributions shall not reduce the Current Principal Amount of the
Class PO Certificates and (iii) no distribution will be made in respect of the
Class PO Deferred Amount after the Cross-Over Date.
The "Class A-I-11 Optimal Principal Amount" for any Distribution Date
occurring prior to the Distribution Date in January 2002 will equal zero. The
Class A-I-11 Optimal Principal Amount for any Distribution Date occurring after
the first five years following the Closing Date will be as follows: for any
Distribution Date during the sixth year after the Closing Date, 30% of the Class
A-I-11 Pro Rata Optimal Principal Amount (as defined below) for such
Distribution Date; for any Distribution Date during the seventh year after the
Closing Date, 40% of the Class A-I-11 Pro Rata Optimal Principal Amount for such
Distribution Date; for any Distribution Date during the eighth year after the
Closing Date, 60% of the Class A-I-11 Pro Rata Optimal Principal Amount for such
Distribution Date; for any Distribution Date during the ninth year after the
Closing Date, 80% of the Class A-I-11 Pro Rata Optimal Principal Amount for such
Distribution Date; and for any Distribution Date during and after the tenth year
after the Closing Date, 100% of the Class A-I-11 Pro Rata Optimal Principal
Amount. Notwithstanding the foregoing, if on any Distribution Date the Current
Principal Amount of each Class of Class A-I Certificates (other than the Class
A-I-8 and Class A-I-11 Certificates) has been reduced to zero, the Class A-I-11
Optimal Principal Amount shall equal the Group I Senior Optimal Principal Amount
to the extent not distributed on such Distribution Date to other Classes of
Class A-I Certificates or Residual Certificates.
For any Distribution Date, the "Class A-I-11 Pro Rata Optimal Principal
Amount" shall be an amount equal to the product of (x) the Group I Senior
Optimal Principal Amount for such Distribution Date multiplied by (y) a
fraction, the numerator of which is the Current Principal Amount of the Class A-
I-11 Certificates immediately prior to such Distribution Date and the
denominator of which is the aggregate Current Principal Amounts of all Classes
of Class A-I Certificates and Residual Certificates immediately prior to such
Distribution Date.
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then Current Principal Amounts of such Classes.
If, after distributions have been made pursuant to priorities (A) first and
second above on any Distribution Date, remaining Group I Available Funds are
less than the sum of the Group I Senior Optimal Principal Amount and the Class
PO Principal Distribution Amount for such Distribution Date, such amounts shall
be proportionately reduced, and such remaining Group I Available Funds will be
distributed on the Class A-I Certificates (other than the Class A-I-8
Certificates), Residual Certificates and Class PO Certificates in accordance
with clauses (a) and (b) of priority (A) third above on the basis of such
reduced amounts. Notwithstanding any reduction in principal distributable to
the Class PO Certificates pursuant to this paragraph, the principal balance of
the Class PO Certificates shall be reduced not only by principal so distributed
but also by the difference between (i) principal distributable to the Class PO
Certificates in accordance with clause (b) of priority (A) third above and (ii)
principal actually distributed to the Class PO Certificates after giving effect
to this paragraph (the "Class PO Cash Shortfall"). The Class PO Cash Shortfall
with respect to any Distribution Date will be added to the Class PO Deferred
Amount.
(B) On each Distribution Date on or prior to the Cross-Over Date, an
amount equal to the Group II Available Funds will be distributed in the
following order of priority among the Certificates:
first, to the Class A-II Certificates and Component II of the Class X
Certificates, the Accrued Certificate Interest on such Class and Class X
Component II Accrued Certificate Interest on such Component for such
Distribution Date;
second, to the Class A-II Certificates and Component II of the Class X
Certificates, any Accrued Certificate Interest and Class X Component II
Accrued Certificate Interest thereon remaining undistributed from previous
Distribution Dates, to the extent of the remaining Group II Available Funds,
any shortfall in available amounts being allocated between such Class and
Component in proportion to the amount of such Accrued Certificate Interest
and Class X
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Component II Accrued Certificate Interest remaining
undistributed for such Class or Component for such Distribution Date; and
third, the Group II Senior Optimal Principal Amount to the Class A-II
Certificates until their Current Principal Amount has been reduced to zero.
(C) On each Distribution Date on or prior to the Cross-Over Date, an
amount equal to any remaining Group I Available Funds and Group II Available
Funds following the distributions in (A) and (B) above will be distributed
sequentially, in the following order, to the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 Certificates, in each case up to an amount
equal to and in the following order: (a) the Accrued Certificate Interest
thereon for such Distribution Date, (b) any Accrued Certificate Interest thereon
remaining undistributed from previous Distribution Dates and (c) such Class's
Allocable Share (as defined herein) for such Distribution Date.
(D) On each Distribution Date prior to the occurrence of the Cross-Over
Date but after the reduction of the Current Principal Amounts of the Class A-I
Certificates (other than the Class A-I-8 Certificates) or Class A-II
Certificates to zero, the remaining Class or Classes of Class A Certificates
(other than the Class A-I-8 Certificates) will be entitled to receive, in
addition to any Principal Prepayments related to such Class A Certificates'
respective Mortgage Loan Group, 100% of the Principal Prepayments on the
Mortgage Loans in the other Mortgage Loan Group (in the case of Mortgage Loan
Group I in accordance with the priorities set forth in priority (A) third above,
and in reduction of the Current Principal Amounts). In addition, if on any
Distribution Date on which the aggregate Current Principal Amount of the Class
A-I Certificates (other than the Class A-I-8 Certificates) or Class A-II
Certificates would be greater than the aggregate Scheduled Principal Balance of
the Mortgage Loans in the related Mortgage Loan Group (other than the related PO
Percentage (as defined herein) of the Group I Discount Mortgage Loans in
Mortgage Loan Group I) and Class B Certificates are still outstanding, in each
case after giving effect to distributions to be made on such Distribution Date,
100% of the Principal Prepayments otherwise allocable to the Class B
Certificates on the Mortgage Loans in the other Mortgage Loan Group will be
distributed to such Class or Classes of Class A Certificates (other than the
Class A-I-8 Certificates) (in the case of the Class A-I Certificates, in
accordance with the priorities set forth in priority (A) third above) in
reduction of the Current Principal Amounts thereof, until the aggregate Current
Principal Amount of the Class A-I Certificates (other than the Class A-I-8
Certificates) or Class A-II Certificates, as applicable, is an amount equal to
the aggregate Scheduled Principal Balance of the Mortgage Loans in the related
Mortgage Loan Group (other than the related PO Percentage of the Group I
Discount Mortgage Loans in Mortgage Loan Group I).
(E) On each Distribution Date after the Cross-Over Date, distributions
of principal on the outstanding Class A-I Certificates (other than the Class
A-I-8 Certificates) and Residual Certificates will be made pro rata among all
such Certificates, regardless of the allocation, or sequential nature, of
principal payments described in priority (A) third above, based upon the then
Current Principal Amounts of such Certificates, and interest will be distributed
as described above with respect to Distribution Dates on or prior to the Cross-
Over Date.
(F) On each Distribution Date, any Group I Available Funds and Group II
Available Funds remaining after payment of interest and principal as described
above will be distributed to the Class R-1 and Class R-2 Certificates; provided
that if on any Distribution Date there are any Group I Available Funds remaining
after payment of interest and principal as described in the preceding
paragraphs, such Group I Available Funds will be distributed to the Class A-II
Certificates in accordance with the priorities in paragraph (B) above until all
amounts due to such Certificates have been paid in full before any amounts are
distributed to the Residual Certificates. Similarly, if on any Distribution
Date there are any Group II Available Funds remaining after payment of interest
and principal as described in the preceding paragraphs, such Group II Available
Funds will be distributed to the Senior Certificates (other than the Class A-II
Certificates and Component II of the Class X Certificates) in accordance with
the priorities in priority (A) third above or paragraph (E) above, as
applicable, until all amounts due to such Senior Certificates have been paid in
full before any amounts are distributed to the Residual Certificates. It is not
anticipated that there will be any significant amounts remaining for such
distribution.
Interest. Interest will accrue during the preceding Interest Accrual Period
for each interest-bearing Class of Certificates at its Pass-Through Rate on the
Current Principal Amount or Notional Amount of such Class immediately preceding
such Distribution Date. The effective yield to the holders of Certificates
(other than the Class A-I-7 and Class A-
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I-8 Certificates) will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because interest will not be
distributed to such Certificateholders until the 25th day (or if such day is not
a Business Day, then on the next succeeding Business Day) of the month following
the month in which interest accrues on the Mortgage Loans. See "Yield and
Prepayment Considerations" herein.
All interest-bearing Offered Certificates (other than the Class A-I-7, Class
A-I-8, Class X and Class R-2 Certificates) will bear interest at the fixed Pass-
Through Rates set forth on the cover page hereof.
The Class A-I-7 Certificates will bear interest at 5.825% per annum during
the first Interest Accrual Period. During each Interest Accrual Period
thereafter, the Class A-I-7 Certificates will bear interest subject to a maximum
rate of 9.00% per annum and a minimum rate of 0.45% per annum, at a rate per
annum equal to 0.45% in excess of LIBOR, as more fully described below.
The Class A-I-8 Certificates will bear interest on the Class A-I-8 Notional
Amount at 3.175% per annum during the first Interest Accrual Period. During each
Interest Accrual Period thereafter, the Class A-I-8 Certificates will bear
interest on the Class A-I-8 Notional Amount subject to a maximum rate of 8.55%
per annum and a minimum rate of 0% per annum, at a rate equal to 8.55% - LIBOR,
as more fully described below.
The Class X Certificates will bear interest on the Class X Notional Amount
at a variable Pass-Through Rate equal to the excess of (a) the weighted average
of the Net Rates of all of the Mortgage Loans over (b) the weighted average of
the Pass-Through Rates of all the Certificates (other than the Class X
Certificates). The Pass-Through Rate for the Class X Certificates for the first
Interest Accrual Period is expected to be approximately 1.04% per annum.
In order to calculate the source of interest due on the Class X Certificates
and for REMIC purposes, the Class X Certificates are deemed to consist of
separate components (each, a "Separate Component"), certain of which correspond
to the Class A-I Certificates, the Class R-1 Certificates and a principal amount
of the Class B Certificates which derives its distributions from the Group I
Mortgage Loans (collectively, "Component I") and one which corresponds to the
Class A-II Certificates and the principal amount of the Class B Certificates
which derives its distributions from the Group II Mortgage Loans ("Component
II").
Since interest on the Class X Certificates is based on amounts paid on both
the Group I Mortgage Loans and the Group II Mortgage Loans, the Accrued
Certificate Interest for the Class X Certificates may also be expressed as the
sum of the Class X Component I Accrued Certificate Interest and the Class X
Component II Accrued Certificate Interest (each as defined below.)
"Class X Component I Accrued Certificate Interest" for any Distribution Date
is equal to the excess of the interest accrued on the Group I Mortgage Loans at
the weighted average of the Net Rates of such Mortgage Loans for such
Distribution Date over the sum of (x) all Accrued Certificate Interest on the
Class A-I Certificates and the Residual Certificates for such Distribution Date,
(y) the portion of the Accrued Certificate Interest on the Class B Certificates
for such Distribution Date that the Class B Group I Current Principal Amount as
of such Distribution Date bears to the aggregate Current Principal Amounts of
the Class B Certificates as of such Distribution Date, and (z) the portion of
(i) any Net Interest Shortfall and (ii) the interest portion of any Excess
Losses, and after the Cross-Over Date, (iii) the interest portion of any
Realized Losses, allocated to the Class X Certificates that the Class X
Component I Accrued Certificate Interest (determined without regard to this
clause (z)) bears to the total Accrued Certificate Interest on the Class X
Certificates (determined without regard to such Net Interest Shortfall, or the
interest portion of Excess Losses or Realized Losses, as applicable). For this
purpose, the "Class B Group I Current Principal Amount" as of any Distribution
Date equals the aggregate Current Principal Amounts of the Class B Certificates
as of such Distribution Date less the Class B Group II Current Principal Amount
(as defined below) as of such Distribution Date. However, if on any Distribution
Date, the interest on the Group II Mortgage Loans at their Net Rates is less
than the Accrued Certificate Interest on the Class A-II Certificates, the Class
X Component I Accrued Certificate Interest for such Distribution Date shall
equal the Accrued Certificate Interest for the Class X Certificates.
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<PAGE>
"Class X Component II Accrued Certificate Interest" for any Distribution
Date is equal to the excess of the interest accrued on the Group II Mortgage
Loans at the weighted average of the Net Rates of such Mortgage Loans for such
Distribution Date over the sum of (x) all Accrued Certificate Interest on the
Class A-II Certificates for such Distribution Date, (y) the portion of the
Accrued Certificate Interest on the Class B Certificates for such Distribution
Date that the Class B Group II Current Principal Amount as of such Distribution
Date bears to the aggregate Current Principal Amounts of the Class B
Certificates as of such Distribution Date, and (z) the portion of (i) any Net
Interest Shortfall and (ii) the interest portion of any Excess Losses, and after
the Cross-Over Date, (iii) the interest portion of any Realized Losses,
allocated to the Class X Certificates that the Class X Component II Accrued
Certificate Interest (determined without regard to this clause (z)) bears to the
total Accrued Certificate Interest on the Class X Certificates (determined
without regard to such Net Interest Shortfall, or the interest portion of Excess
Losses or Realized Losses, as applicable). For this purpose, the "Class B Group
II Current Principal Amount" as of any Distribution Date equals the sum of the
Scheduled Principal Balances of the Group II Mortgage Loans as of such
Distribution Date less the Current Principal Amount of the Class A-II
Certificates as of such Distribution Date. However, if on any Distribution Date,
the interest on the Group I Mortgage Loans at their Net Rates is less than the
Accrued Certificate Interest on the Class A-I Certificates, the Class X
Component II Accrued Certificate Interest for such Distribution Date shall equal
the Accrued Certificate Interest for the Class X Certificates.
The Class R-2 Certificates will bear interest on their Current Principal
Amount at a variable Pass-through Rate equal to the weighted average of the Net
Rates of the Group I Mortgage Loans. The Pass-Through Rate for the Class R-2
Certificates for the first Interest Accrual Period is expected to be
approximately 8.81% per annum.
The "Accrued Certificate Interest" for any interest-bearing Certificate for
any Distribution Date will equal the interest accrued during the related
Interest Accrual Period at the applicable Pass-Through Rate on the Current
Principal Amount (or, in the case of the Class A-I-8 Certificates, the Class
A-I-8 Notional Amount, and in the case of a Class X Certificate, the Class X
Notional Amount) of such Certificate immediately prior to such Distribution Date
less (i) in the case of an interest-bearing Senior Certificate, such
Certificate's share of any Net Interest Shortfall (as defined herein) and the
interest portion of any Excess Losses and, after the Cross-Over Date, the
interest portion of any Realized Losses and (ii) in the case of a Subordinate
Certificate, such Certificate's share of any Net Interest Shortfall and the
interest portion of any Realized Losses. Such shortfalls and losses will be
allocated among the Senior Certificates in proportion to the amount of Accrued
Certificate Interest that would have been allocated thereto in the absence of
such shortfalls and losses. Accrued Certificate Interest is calculated on the
basis of a 360-day year consisting of twelve 30-day months. No Accrued
Certificate Interest will be payable with respect to any Class of Certificates
after the Distribution Date on which the outstanding principal balance (or Class
A-I-8 Notional Amount or Class X Notional Amount) of such Certificate has been
reduced to zero.
The "Current Principal Amount" of any Certificate (other than a Class A-I-8
or Class X Certificate) as of any Distribution Date will equal such
Certificate's initial principal amount on the Closing Date as reduced by (i) all
amounts distributed on previous Distribution Dates on such Certificate on
account of principal (and the Class PO Cash Shortfall with respect to a Class PO
Certificate), (ii) the principal portion of all Realized Losses previously
allocated to such Certificate and (iii) in the case of a Subordinate
Certificate, such Certificate's share, if any, of the Subordinate Certificate
Writedown Amount and the Class PO Deferred Payment Writedown Amount for previous
Distribution Dates. With respect to any Class of Certificates (other than the
Class A-I-8 or Class X Certificates), the Current Principal Amount thereof will
equal the sum of the Current Principal Amounts of all Certificates in such
Class.
As of any Distribution Date, the "Subordinate Certificate Writedown Amount"
will equal the amount by which (a) the sum of the Current Principal Amounts of
all of the Certificates (after giving effect to the distribution of principal
and the allocation of Realized Losses and the Class PO Deferred Payment
Writedown Amount in reduction of the Current Principal Amounts of the
Certificates on such Distribution Date) exceeds (b) the sum of the Scheduled
Principal Balances of the Mortgage Loans on the first day of the month of such
Distribution Date less any Deficient Valuation occurring on or prior to the
Bankruptcy Coverage Termination Date (as defined herein). For any Distribution
Date, the "Class PO Deferred Payment Writedown Amount" will equal the amount, if
any, distributed on such date in respect of the Class PO Deferred Amount
pursuant to priority (A) fourth under "--Allocation of Available Funds" above.
The Subordinate Certificate Writedown Amount and the Class PO Deferred Payment
Writedown Amount will be allocated to the Classes of Subordinate Certificates in
inverse order of their numerical Class designations, until the Current Principal
Amount of each
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such Class has been reduced to zero and, from and after the Cross-Over Date, the
Subordinate Certificate Writedown Amount will be allocated pro rata among the
Classes of Senior Certificates (other than the Class A-I-8, Class X and Class PO
Certificates) based on their then-outstanding Current Principal Amounts.
The Class A-I-8 Certificates will have a notional principal balance equal to
the Current Principal Amount of the Class A-I-7 Certificates.
The Class X Certificates will have a notional principal balance equal to the
aggregate Scheduled Principal Balances of all of the Mortgage Loans.
With respect to any Distribution Date, the "Interest Shortfall" is equal to
the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Rates) resulting from (a) prepayments in full received during the
related Prepayment Period, (b) partial prepayments received during the related
Prepayment Period to the extent applied prior to the Due Date in the month of
the Distribution Date and (c) interest payments on certain of the Mortgage Loans
being limited pursuant to the provisions of the Soldiers' and Sailors' Civil
Relief Act of 1940 (the "Relief Act"). Interest Shortfalls will result because
(i) Mortgagors are obligated to pay interest on prepayments in full only to the
date of prepayment by the Mortgagor, (ii) (a) partial prepayments are generally
not required to be accompanied by interest on the amount of such partial
prepayment and (b) partial prepayments applied prior to the Due Date in the
month of the Distribution Date will result in a reduction of the Scheduled
Principal Balance of the related Mortgage Loan without a corresponding reduction
of the Current Principal Amount of any Certificate and (iii) the Relief Act
limits, in certain circumstances, the interest rate required to be paid by a
Mortgagor in the military service, to 6% per annum. Interest Shortfalls
resulting from prepayments in full or in part in any calendar month will be
offset by the Master Servicer on the Distribution Date in the following calendar
month to the extent that such Interest Shortfalls do not exceed the lesser of
(i) the Master Servicing Fee in connection with such Distribution Date or (ii)
1/12 of 0.125% of the Scheduled Principal Balances of the Mortgage Loans with
respect to such Distribution Date. The amount of the Master Servicing Fee used
to offset such Interest Shortfalls is referred to herein as "Compensating
Interest Payments." Interest Shortfalls net of Compensating Interest Payments
are referred to herein as "Net Interest Shortfalls."
If on any Distribution Date the Group I Available Funds are less than the
Accrued Certificate Interest on the Class A-I and Residual Certificates and the
Class X Component I Accrued Certificate Interest on Component I of the Class X
Certificates or if the Group II Available Funds are less than the Accrued
Certificate Interest on the Class A-II Certificates and the Class X Component II
Accrued Certificate Interest on Component II of the Class X Certificates, in
each case for such Distribution Date and prior to reduction for Net Interest
Shortfall and the interest portion of Realized Losses, the shortfall will be
allocated among the holders of each such respective Class or Component in
proportion to the respective amounts of Accrued Certificate Interest and Class X
Component I Accrued Certificate Interest or Class X Component II Accrued
Certificate Interest, as applicable, that would have been allocated thereto in
the absence of such Net Interest Shortfall and/or Realized Losses for such
Distribution Date on each such Class or Component. In addition, the amount of
any interest shortfalls with respect to the related Mortgage Loan Group that are
covered by subordination will constitute unpaid Accrued Certificate Interest or
unpaid Class X Component I Accrued Certificate Interest or unpaid Class X
Component II Accrued Certificate Interest and will be distributable to holders
of the Certificates of the related Classes or Component entitled to such amounts
on subsequent Distribution Dates, to the extent of Group I Available Funds or
Group II Available Funds, as applicable, after interest distributions as
required herein. Any such amounts so carried forward will not bear interest.
Shortfalls in interest payments will not be offset by a reduction in the
servicing compensation of the Master Servicer or otherwise, except to the
limited extent described above.
Commencing on January 23, 1997 and monthly thereafter on the second Business
Day prior to the first day of the related Interest Accrual Period for the Class
A-I-7 and Class A-I-8 Certificates (each, a "LIBOR Determination Date"), until
the Current Principal Amount of the Class A-I-7 Certificates and the Class A-I-8
Notional Amount have been reduced to zero, the Trustee will request each of the
designated reference banks meeting the criteria set forth herein (the "Reference
Banks") to inform the Trustee of the quotation offered by its principal London
office for making one-month United States dollar deposits in leading banks in
the London interbank market, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. For purposes of calculating LIBOR, "Business Day" means a
day on which banks are open for dealing in foreign currency and exchange in
London and New York City. In lieu of making a request of the Reference Banks,
the Trustee may rely on the quotations for those Reference Banks that appear at
such time on the page (the
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<PAGE>
"Relevant Screen Page"), whatever its designation, on which LIBOR is for the
time being displayed on the Reuters Monitor Money Rates Service or the
appropriate Associated Press -- Dow Jones Telerate
Service.
LIBOR will be established by the Trustee on each LIBOR Determination Date as
follows:
(a) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next Interest
Accrual Period shall be whichever is the higher of (i) LIBOR as determined on
the previous LIBOR Determination Date or (ii) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum which the Trustee determines
to be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/32%) of the one-month United States dollar lending
rates that New York City banks selected by BSMSI are quoting, on the relevant
LIBOR Determination Date, to the principal London offices of at least two of the
Reference Banks to which such quotations are, in the opinion of the Trustee,
being so made, or (ii) in the event that the Trustee can determine no such
arithmetic mean, the lowest one-month United States dollar lending rate which
New York City banks selected by BSMSI are quoting on such LIBOR Determination
Date to leading European banks.
(c) If on any LIBOR Determination Date, the Trustee is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR shall be 5.375%.
Each Reference Bank shall (i) be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not control,
be controlled by, or be under common control with BSMSI, and (iii) have an
established place of business in London. If any such Reference Bank should be
unwilling or unable to act as such or if BSMSI should terminate the appointment
of any such Reference Bank, BSMSI will promptly appoint another leading bank
meeting the criteria specified above.
The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class A-
I-7 and A-I-8 Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding. Each such rate of interest may
be obtained by telephoning the Trustee at 1-800-735-7777.
Principal. An amount equal to all amounts payable in respect of principal of
the Group I Mortgage Loans will be allocated between (i) the Senior Certificates
(other than the Class A-I-8, Class A-II, Class PO and Class X Certificates) and
the Subordinate Certificates, on the one hand, and (ii) the Class PO
Certificates, on the other, in each case based on the applicable Non-PO
Percentage and the applicable PO Percentage, respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net Rate
less than 8.00% per annum (each such Mortgage Loan, a "Group I Discount Mortgage
Loan") will be equal to the Net Rate thereof divided by 8.00%. The "Non-PO
Percentage" with respect to any Mortgage Loan with a Net Rate equal to or
greater than 8.00% (each such Mortgage Loan, a "Non-Discount Mortgage Loan")
will be 100%. The "PO Percentage" with respect to any Discount Mortgage Loan
will be the fraction, expressed as a percentage, equal to 8.00% minus the Net
Rate thereof divided by 8.00%. The "PO Percentage" with respect to any Non-
Discount Mortgage Loan will be 0%.
Distributions in reduction of the Current Principal Amount of each Class of
Senior Certificates (other than the Class A-I-8, Class A-II and Class X
Certificates) will be made on each Distribution Date pursuant to priority (A)
third above, the fourth paragraph following priority (A) fourth and paragraphs
(D), (E) and (F) above under "--Allocation of Available Funds." In accordance
with priority (A) third, the Group I Available Funds remaining after
distribution of interest on the Class A-I Certificates, the Residual
Certificates and Component I of the Class X Certificates on such Distribution
Date will be allocated to the Class A-I and the Residual Certificates, and the
Class PO Certificates in an aggregate amount not to exceed the sum of the Group
I Senior Optimal Principal Amount and the Class PO Principal Distribution Amount
for such Distribution Date.
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<PAGE>
Distributions in reduction of the Current Principal Amount of the Class A-
II Certificates will be made on each Distribution Date pursuant to priority (B)
third and paragraphs (D) and (F) under "-- Allocation of Available Funds" above.
Distributions in reduction of the Current Principal Amounts of the
Subordinate Certificates will be made pursuant to paragraph (C) under "--
Allocation of Available Funds" above. The sum of the Group I Available Funds and
the Group II Available Funds, if any, remaining after distributions of principal
and interest on the Senior Certificates and payments in respect of the Class PO
Deferred Amount on such Distribution Date will be allocated to the Subordinate
Certificates in an amount equal to each such Class's Allocable Share for such
Distribution Date, provided that no distribution of principal will be made on
any such Class until any Class ranking prior thereto has received distributions
of interest and principal, and such Class has received distributions of
interest, on such Distribution Date.
The amount to which the Senior Certificates (other than the Class A-I-8,
Class PO and Class X Certificates) are entitled as principal on any Distribution
Date will be determined separately for the Class A-I Certificates and the
Residual Certificates (the "Group I Senior Optimal Principal Amount") and for
the Class A-II Certificates (the "Group II Senior Optimal Principal Amount") and
in each case will be an amount equal to the sum of:
(i) the applicable Senior Percentage (as defined below) of the
applicable Non-PO Percentage of all scheduled payments of principal due on each
Mortgage Loan in the related Mortgage Loan Group on the first day of the month
in which the Distribution Date occurs, as specified in the amortization schedule
at the time applicable thereto (after adjustment for previous principal
prepayments and the principal portion of Debt Service Reductions after the
Bankruptcy Coverage Termination Date, but before any adjustment to such
amortization schedule by reason of any other bankruptcy or similar proceeding or
any moratorium or similar waiver or grace period);
(ii) the applicable Senior Prepayment Percentage (as defined below) of
the applicable Non-PO Percentage of the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was the subject of a
prepayment in full received by the Master Servicer during the applicable
Prepayment Period (as defined below);
(iii) the applicable Senior Prepayment Percentage of the applicable
Non-PO Percentage of all partial prepayments of principal received on each
Mortgage Loan in the related Mortgage Loan Group during the applicable
Prepayment Period;
(iv) the lesser of (a) the applicable Senior Prepayment Percentage of
the applicable Non-PO Percentage of the sum of (w) the net liquidation proceeds
allocable to principal on each Mortgage Loan in the related Mortgage Loan Group
which became a Liquidated Mortgage Loan during the related Prepayment Period
(other than Mortgage Loans described in clause (x)) and (x) the Scheduled
Principal Balance of each Mortgage Loan in the related Mortgage Loan Group that
was purchased by a private mortgage insurer during the related Prepayment Period
as an alternative to paying a claim under the related insurance policy, and (b)
the applicable Senior Percentage of the applicable Non-PO Percentage of the sum
of (w) the Scheduled Principal Balance of each Mortgage Loan in the related
Mortgage Loan Group which became a Liquidated Mortgage Loan during the related
Prepayment Period (other than Mortgage Loans described in clause (x)) and (x)
the Scheduled Principal Balance of each Mortgage Loan in the related Mortgage
Loan Group that was purchased by a private mortgage insurer during the related
Prepayment Period as an alternative to paying a claim under the related
insurance policy less (y) in the case of clause (b), the applicable Senior
Percentage of the applicable Non-PO Percentage of the principal portion of
Excess Losses (other than Debt Service Reductions) on each Mortgage Loan in the
related Mortgage Loan Group incurred during the related Prepayment Period; and
(v) the applicable Senior Prepayment Percentage of the applicable
Non-PO Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was repurchased by the
Master Servicer in connection with such Distribution Date and (b) the
difference, if any, between the Scheduled Principal Balance of a Mortgage Loan
in the related Mortgage Loan Group that has been replaced by the Master Servicer
with a substitute Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date and the Scheduled Principal Balance of such substitute
Mortgage Loan.
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<PAGE>
With respect to any Mortgage Loan and any Distribution Date, the "Prepayment
Period" is the period from the first day through the last day of the month
preceding the month of such Distribution Date.
The "Class A-I Senior Percentage" and the "Class A-II Senior Percentage"
(each, a "Senior Percentage") will each initially equal approximately 91.75%.
Each Senior Percentage will be recalculated with respect to each Distribution
Date to equal the lesser of (i) 100% and (ii) the percentage (carried to six
places rounded up) obtained by dividing the aggregate Current Principal Amounts
of all of the Class A-I Certificates and the Residual Certificates in the case
of the Class A-I Senior Percentage and the Class A-II Certificates in the case
of the Class A-II Senior Percentage immediately preceding such Distribution Date
by the aggregate Scheduled Principal Balance of all the Mortgage Loans in the
related Mortgage Loan Group (other than the PO Percentage of the Group I
Discount Mortgage Loans in the case of Mortgage Loan Group I) immediately
preceding such Distribution Date. The initial Class A-I Senior Percentage is
greater than the initial percentage interest in Mortgage Loan Group I evidenced
by the related Classes of Class A-I Certificates and Residual Certificates in
the aggregate, because such percentage is calculated without regard to the PO
Percentage of the Scheduled Principal Balance of each Group I Discount Mortgage
Loan.
The "Senior Prepayment Percentage" with respect to each Mortgage Loan Group
on any Distribution Date occurring during the periods set forth below will be as
follows:
<TABLE>
<CAPTION>
Period (dates inclusive) Senior Prepayment Percentage
- ------------------------ ----------------------------
<S> <C>
January 25, 1997 -December 25, 2001................. 100%
January 25, 2002 -December 25, 2002................. applicable Senior Percentage plus 70% of
the Subordinate Percentage
January 25, 2003 -December 25, 2003................. applicable Senior Percentage plus 60% of
the Subordinate Percentage
January 25, 2004 -December 25, 2004................. applicable Senior Percentage plus 40% of
the Subordinate Percentage
January 25, 2005 -December 25, 2005................. applicable Senior Percentage plus 20% of
the Subordinate Percentage
January 25, 2006 and thereafter..................... applicable Senior Percentage
</TABLE>
Notwithstanding the foregoing, if on any Distribution Date the applicable
Senior Percentage exceeds the applicable Senior Percentage as of the Cut-off
Date, the related Senior Prepayment Percentage for such Distribution Date will
equal 100%. Upon reduction of the Current Principal Amounts of the Class A-I
Certificates and the Residual Certificates or the Class A-II Certificates, as
applicable, to zero, the related Senior Prepayment Percentage will equal 0%;
provided that in the circumstances described in paragraph (D) above under "--
Allocation of Available Funds," prepayments resulting from Mortgage Loans in one
Mortgage Loan Group and otherwise distributable to the Subordinate Certificates
will be distributed to the Senior Certificates related to the other Mortgage
Loan Group (other than the Class PO and Class X Certificates in the case of the
Group I Mortgage Loans).
In addition, no reduction of a Senior Prepayment Percentage shall occur on
any Distribution Date (such limitation being the "Senior Prepayment Percentage
Stepdown Limitation") unless, as of the last day of the month preceding such
Distribution Date, either (a)(i)(X) the aggregate outstanding principal balance
of Mortgage Loans in both Mortgage Loan Groups delinquent 60 days or more
(including for this purpose any Mortgage Loans in foreclosure and Mortgage Loans
with respect to which the related Mortgaged Property has been acquired by the
Trust), averaged over the last six months, as a percentage of the aggregate
Current Principal Amount of the Subordinate Certificates averaged over the last
six months, does not exceed 50% or (Y) the aggregate outstanding principal
balance of the Mortgage Loans in both Mortgage Loan Groups delinquent 60 days or
more averaged over the last six months, as a percentage of the aggregate
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<PAGE>
outstanding principal balance of all Mortgage Loans averaged over the last six
months, does not exceed 2% and (ii) cumulative Realized Losses on the Mortgage
Loans in both Mortgage Loan Groups do not exceed (a) 30% of the aggregate
Current Principal Amounts of the Subordinate Certificates as of the Cut-off Date
(the "Original Subordinate Principal Balance") if such Distribution Date occurs
between and including January 2002 and December 2002, (b) 35% of the related
Original Subordinate Principal Balance if such Distribution Date occurs between
and including January 2003 and December 2003, (c) 40% of the related Original
Subordinate Principal Balance if such Distribution Date occurs between and
including January 2004 and December 2004, (d) 45% of the related Original
Subordinate Principal Balance if such Distribution Date occurs between and
including January 2005 and December 2005, and (e) 50% of the related Original
Subordinate Principal Balance if such Distribution Date occurs during or after
January 2006 or (b)(i) the outstanding principal balance of the Mortgage Loans
in both Mortgage Loan Groups delinquent 60 days or more averaged over the last
six months, as a percentage of the aggregate outstanding principal balance of
all Mortgage Loans averaged over the last six months, does not exceed 4% and
(ii) Realized Losses on the Mortgage Loans in both Mortgage Loan Groups to date
for such Distribution Date are less than 10% of the Original Subordinate
Principal Balance.
The "Class PO Principal Distribution Amount" with respect to each Distribution
Date will be an amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of principal
due on each Group I Discount Mortgage Loan on the first day of the month in
which the Distribution Date occurs, as specified in the amortization schedule at
the time applicable thereto (after adjustment for previous principal prepayments
and the principal portion of Debt Service Reductions after the Bankruptcy
Coverage Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period);
(ii) the applicable PO Percentage of the Scheduled Principal Balance of
each Group I Discount Mortgage Loan which was the subject of a prepayment in
full received by the Master Servicer during the applicable Prepayment Period;
(iii) the applicable PO Percentage of all partial prepayments of principal
on Group I Mortgage Loans received during the applicable Prepayment Period;
(iv) the lesser of (a) the applicable PO Percentage of the sum of (w) the
net liquidation proceeds allocable to principal on each Group I Discount
Mortgage Loan which became a Liquidated Mortgage Loan during the related
Prepayment Period (other than Group I Discount Mortgage Loans described in
clause (x)) and (x) the Scheduled Principal Balance of each Group I Discount
Mortgage Loan that was purchased by a private mortgage insurer during the
related Prepayment Period as an alternative to paying a claim under the related
insurance policy, and (b) the applicable PO Percentage of the sum of (w) the
Scheduled Principal Balance of each Group I Discount Mortgage Loan which became
a Liquidated Mortgage Loan during the related Prepayment Period (other than
Group I Discount Mortgage Loans described in clause (x)) and (x) the Scheduled
Principal Balance of each Group I Discount Mortgage Loan that was purchased by a
private mortgage insurer during the related Prepayment Period as an alternative
to paying a claim under the related insurance policy less (y) in the case of
clause (b), the applicable PO Percentage of the principal portion of Excess
Losses (other than Debt Service Reductions) with respect to Group I Mortgage
Loans incurred during the related Prepayment Period; and
(v) the applicable PO Percentage of the sum of (a) the Scheduled Principal
Balance of each Group I Discount Mortgage Loan which was repurchased by the
Master Servicer in connection with such Distribution Date and (b) the
difference, if any, between the Scheduled Principal Balance of a Group I
Discount Mortgage Loan that has been replaced by the Master Servicer with a
substitute Group I Discount Mortgage Loan pursuant to the Agreement in
connection with such Distribution Date and the Scheduled Principal Balance of
such substitute Group I Discount Mortgage Loan.
The "Subordinate Percentage" with respect to each Mortgage Loan Group, which
will initially equal approximately 8.25% with respect to each of Mortgage Loan
Group I and Mortgage Loan Group II, will be recalculated for each Distribution
Date to equal 100% minus the related Senior Percentage for such Distribution
Date. The "Subordinate
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<PAGE>
Prepayment Percentage" with respect to each Mortgage Loan Group on any
Distribution Date will equal 100% minus the related Senior Prepayment
Percentage, except that on any Distribution Date after the Current Principal
Amounts of the related Senior Certificates (other than the Class PO Certificates
in the case of Mortgage Loan Group I) have each been reduced to zero, the
applicable Subordinate Prepayment Percentage will equal 100%.
The "Subordinate Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum of the following (but in no event
greater than the aggregate Current Principal Amounts of the Subordinate
Certificates immediately prior to such Distribution Date):
(i) the applicable Subordinate Percentage of the applicable Non-PO
Percentage of all scheduled payments of principal due on each Mortgage Loan in
the related Mortgage Loan Group on the first day of the month in which the
Distribution Date occurs, as specified in the amortization schedule at the time
applicable thereto (after adjustment for previous principal prepayments and the
principal portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization schedule by
reason of any other bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period);
(ii) the applicable Subordinate Prepayment Percentage of the applicable
Non-PO Percentage of the Scheduled Principal Balance of each Mortgage Loan in
the related Mortgage Loan Group which was the subject of a prepayment in full
received by the Master Servicer during the applicable Prepayment Period;
(iii) the applicable Subordinate Prepayment Percentage of the applicable
Non-PO Percentage of all partial prepayments of principal received on Mortgage
Loans in the Related Mortgage Loan Group during the applicable Prepayment Period
(plus, on the Distribution Date on which the Current Principal Amounts of the
related Senior Certificates (other than the Class PO Certificates in the case of
Mortgage Loan Group I) have all been reduced to zero, 100% of any applicable
Senior Optimal Principal Amount remaining undistributed on such date);
(iv) the excess, if any, of the applicable Non-PO Percentage of the sum of
(a) the net liquidation proceeds allocable to principal received during the
related Prepayment Period in respect of each Liquidated Mortgage Loan in the
related Mortgage Loan Group (other than Mortgage Loans described in clause (b))
and (b) the principal balance of each Mortgage Loan in the related Mortgage Loan
Group that was purchased by a private mortgage insurer during the related
Prepayment Period as an alternative to paying a claim under the related
insurance policy over (c) the sum of the amounts distributable to the related
Senior Certificateholders pursuant to clause (iv) of each of the definitions of
Group I Senior Optimal Principal Amount, Group II Senior Optimal Principal
Amount and Class PO Principal Distribution Amount on such Distribution Date; and
(v) the applicable Subordinate Prepayment Percentage of the applicable
Non-PO Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was repurchased by the
Master Servicer in connection with such Distribution Date and (b) the
difference, if any, between the Scheduled Principal Balance of a Mortgage Loan
in the related Mortgage Loan Group that has been replaced by the Master Servicer
with a substitute Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date and the Scheduled Principal Balance of such substitute
Mortgage Loan.
The "Allocable Share" with respect to any Class of Subordinate Certificates
on any Distribution Date will generally equal such Class's pro rata share (based
on the Current Principal Amount of each Class entitled thereto) of each of the
components of the definition of the Subordinate Optimal Principal Amount;
provided, that, except as described in the second succeeding sentence, no Class
of Subordinate Certificates shall be entitled on any Distribution Date to
receive distributions pursuant to clauses (ii), (iii) and (v) of the definition
of the Subordinate Optimal Principal Amount unless the Class Prepayment
Distribution Trigger for the related Class is satisfied for such Distribution
Date. The "Class Prepayment Distribution Trigger" for a Class of Subordinate
Certificates for any Distribution Date is satisfied if the fraction (expressed
as a percentage), the numerator of which is the aggregate Current Principal
Amount of such Class and each Class subordinate thereto, if any, and the
denominator of which is the Scheduled Principal Balances of all of the Mortgage
Loans as of the Due Date in the month next preceding such Distribution Date,
equals or exceeds such percentage calculated as of the Closing Date. If on any
Distribution Date the Current Principal Amount of any Class of Subordinate
Certificates for which the related Class Prepayment Distribution Trigger was
satisfied on such Distribution Date is reduced to zero, any
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<PAGE>
amounts distributable to such Class pursuant to clauses (ii), (iii) and (v) of
the definition of "Subordinate Optimal Principal Amount," to the extent of such
Class's remaining Allocable Share, shall be distributed to the remaining Classes
of Subordinate Certificates in reduction of their respective Current Principal
Amounts in the order of their numerical Class designations. If the Class
Prepayment Distribution Trigger is not satisfied for any Class of Subordinate
Certificates on any Distribution Date, this may have the effect of accelerating
the amortization of more senior Classes of Subordinate Certificates. On any
Distribution Date, any reduction in funds available for distribution to the
Classes of Subordinate Certificates resulting from a distribution of the Class
PO Deferred Amount will be allocated to the Classes of Subordinate Certificates,
in reduction of the Allocable Shares thereof, in inverse order of their
numerical Class designations.
"Determination Date" means the 21st day of the month of the Distribution
Date, or if such day is not a Business Day, the following Business Day (but in
no event less than two Business Days prior to the related Distribution Date).
"Insurance Proceeds" are amounts paid by an insurer under any Primary
Insurance Policy, standard hazard insurance policy, flood insurance policy or
title insurance policy covering any Mortgage Loan or Mortgaged Property other
than amounts required to be paid over to the Mortgagor pursuant to law or the
related Mortgage Note and other than amounts used to repair or restore the
Mortgaged Property or to reimburse certain expenses.
"Repurchase Proceeds" are proceeds of any Mortgage Loan repurchased by ICI
Funding and any cash deposit in connection with the substitution of a Mortgage
Loan pursuant to the provisions described under "The Pooling and Servicing
Agreement--Assignment of Mortgage Loans" and "--Representations and Warranties"
herein.
"Principal Prepayment" is any payment or other recovery of principal on a
Mortgage Loan which is received in advance of its scheduled Due Date to the
extent that it is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months subsequent to
the month of prepayment, including Insurance Proceeds and Repurchase Proceeds,
but excluding Liquidation Proceeds received at the time a Mortgage Loan becomes
a Liquidated Mortgage Loan.
"Monthly Payment" with respect to any Mortgage Loan and any month is the
scheduled payment or payments of principal and interest due during such month on
such Mortgage Loan which either is payable by a Mortgagor in such month under
the related Mortgage Note, or in the case of any Mortgaged Property acquired
through foreclosure or deed-in-lieu of foreclosure (each such Mortgaged
Property, an "REO Property"), would otherwise have been payable under the
related Mortgage Note.
Allocation of Losses; Subordination
A "Realized Loss" with respect to a Mortgage Loan is (i) a Bankruptcy Loss
(as defined below) or (ii) as to any Liquidated Mortgage Loan, the unpaid
principal balance thereof plus accrued and unpaid interest thereon at the
Mortgage Rate through the last day of the month of liquidation less the Net
Liquidation Proceeds with respect to such Mortgage Loan and the related
Mortgaged Property. A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan
as to which the Master Servicer has determined that all amounts which it expects
to recover from or on account of such Mortgage Loan have been recovered.
"Liquidation Proceeds" are amounts received by the Master Servicer in
connection with the liquidation of a defaulted Mortgage Loan whether through
trustee's sale, foreclosure sale, proceeds of insurance policies, condemnation
proceeds or otherwise.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are Liquidation
Proceeds net of expenses incurred by the Master Servicer in connection with the
liquidation of such Mortgage Loan and the related Mortgaged Property.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy court
may establish the value of the Mortgaged Property at an amount less than the
then Outstanding Principal Balance of the Mortgage Loan secured by such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan
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<PAGE>
would become an unsecured creditor to the extent of the difference between the
Outstanding Principal Balance of such Mortgage Loan and such reduced secured
debt (such difference, a "Deficient Valuation"). In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction of the amount of the monthly payment on the
related Mortgage Loan (a "Debt Service Reduction").
A "Bankruptcy Loss" with respect to any Mortgage Loan is a Deficient
Valuation or Debt Service Reduction.
A "Fraud Loss" is any Realized Loss attributable to fraud in the
origination of the related Mortgage Loan.
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a Mortgaged Property) other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of such
Mortgaged Property under the Agreement or any loss due to normal wear and tear
or certain other causes.
The applicable Non-PO Percentage of the principal portion of any Realized
Loss (other than Excess Losses) on a Mortgage Loan in either Mortgage Loan Group
for any Distribution Date will not be allocated to any Senior Certificates until
the Cross-Over Date. Prior to the Cross-Over Date (and on such date under
certain circumstances), the applicable Non-PO Percentage of any such Realized
Loss will be allocated among the outstanding Classes of Subordinate
Certificates, in inverse order of priority, until the Current Principal Amount
of each such Class has been reduced to zero (i.e., such Realized Losses will be
allocated first to the Class B-6 Certificates while such Certificates are
outstanding, second to the Class B-5 Certificates, and so on). The applicable
Non-PO Percentage of the principal portion of any Excess Bankruptcy Loss (other
than a Debt Service Reduction), Excess Fraud Loss or Excess Special Hazard Loss
for any Distribution Date will be allocated pro rata among all outstanding
Classes of Certificates (other than the Class PO and Class X Certificates) based
on their Current Principal Amounts. An "Excess Bankruptcy Loss," "Excess Fraud
Loss" or "Excess Special Hazard Loss" is any Bankruptcy Loss, Fraud Loss or
Special Hazard Loss, respectively, occurring after the Bankruptcy Coverage
Termination Date, Fraud Coverage Termination Date and Special Hazard Termination
Date, respectively, as described more fully below. Commencing on the Cross-Over
Date, the applicable Non-PO Percentage of the principal portion of any Realized
Loss (other than a Debt Service Reduction) on a Mortgage Loan will be allocated
among the outstanding Classes of Senior Certificates (other than the Class A-I-
8, Class PO and Class X Certificates) pro rata based upon their Current
Principal Amounts.
Since the Subordinate Certificates will absorb Realized Losses on Mortgage
Loans in both Mortgage Loan Groups, a disproportionate amount of Realized Losses
with respect to Mortgage Loans in either Mortgage Loan Group will adversely
impact the availability of subordination to the Certificates related to the
other Mortgage Loan Group.
On each Distribution Date, the applicable PO Percentage of the principal
portion of any Realized Loss on a Group I Discount Mortgage Loan and Class PO
Cash Shortfall will be allocated to the Class PO Certificates until the Current
Principal Amount thereof is reduced to zero. With respect to any Distribution
Date through the Cross-Over Date, the aggregate of all amounts so allocable to
the Class PO Certificates on such date in respect of Realized Losses (other than
Excess Losses) and Class PO Cash Shortfall and all amounts previously allocated
in respect of such losses or Class PO Cash Shortfall to the Class PO
Certificates and not distributed on prior Distribution Dates will be the "Class
PO Deferred Amount." To the extent Group I Available Funds are available
therefor on any Distribution Date through the Cross-Over Date, distributions in
respect of the Class PO Deferred Amount will be made on the Class PO
Certificates in accordance with priority (A) fourth under "--Allocation of
Available Funds" above. Any distribution of Group I Available Funds in respect
of the Class PO Deferred Amount will not reduce the Class PO Current Principal
Amount. No interest will accrue on the Class PO Deferred Amount. On each
Distribution Date through the Cross-Over Date, the Current Principal Amount of
the lowest ranking Class of Subordinate Certificates then outstanding having the
highest numerical Class designation will be reduced by the amount of any
distributions in respect of the Class PO Deferred Amount on such Distribution
Date, through the operation of the Class PO Deferred Payment Writedown Amount.
After the Cross-Over Date, no more distributions will be made in respect of, and
Realized Losses and Class PO Cash Shortfalls allocated to the Class PO
Certificates will not be added to, the Class PO Deferred Amount.
S-52
<PAGE>
No reduction of the Current Principal Amount of any Class shall be made on
any Distribution Date on account of Realized Losses to the extent that such
reduction would have the effect of reducing the aggregate Current Principal
Amount of all of the Certificates as of such Distribution Date to an amount less
than the Scheduled Principal Balances of all of the Mortgage Loans as of the
first day of the month of such Distribution Date, less any Deficient Valuations
occurring on or prior to the Bankruptcy Coverage Termination Date (such
limitation being the "Loss Allocation Limitation").
The principal portion of Debt Service Reductions will not be allocated in
reduction of the Current Principal Amount of any Certificate. However, after
the Bankruptcy Coverage Termination Date, the amounts distributable under clause
(i) of each of the definitions of Group I Senior Optimal Principal Amount or
Group II Senior Optimal Principal Amount, Class PO Principal Distribution Amount
and Subordinate Optimal Principal Amount will be reduced by the amount of any
Debt Service Reductions. Regardless of when they occur, Debt Service Reductions
may reduce the amount of Available Funds otherwise available for distribution on
a Distribution Date. As a result of the subordination of the Subordinate
Certificates in right of distribution, any Debt Service Reductions prior to the
Bankruptcy Coverage Termination Date will be borne by the Subordinate
Certificates (to the extent then outstanding) in inverse order of priority.
All allocations of Realized Losses will be accomplished on a Distribution
Date by reducing the Current Principal Amount of the applicable Classes by their
appropriate shares of any such losses occurring during the month preceding the
month of such Distribution Date and, accordingly, will be taken into account in
determining the distributions of principal and interest on the Certificates
commencing on the following Distribution Date, except that the aggregate amount
of the principal portion of any Realized Losses to be allocated to the Class PO
Certificates on any Distribution Date through the Cross-Over Date will also be
taken into account in determining distributions in respect of the Class PO
Deferred Amount for such Distribution Date.
The interest portion of all Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby to the extent described under
"Distributions on the Certificates--Interest" above.
Any Deficient Valuation will on each Distribution Date be allocated solely
to the outstanding Subordinate Certificates until the Bankruptcy Coverage
Termination Date. The "Bankruptcy Coverage Termination Date" is the Distribution
Date upon which the Bankruptcy Loss Amount has been reduced to zero or a
negative number (or the Cross-Over Date, if earlier). On each Distribution Date,
the "Bankruptcy Loss Amount" will equal approximately $100,000 (approximately
0.05% of the aggregate Scheduled Principal Balances of the Mortgage Loans as of
the Cut-off Date), subject to reduction as described in the Agreement, minus the
aggregate amount of previous Bankruptcy Losses. The Bankruptcy Loss Amount and
the related coverage levels described above may be reduced or modified upon
written confirmation from S&P and Fitch (each as defined herein) that such
reduction or modification will not adversely affect the then current ratings of
the Senior Certificates by S&P and Fitch. Such reduction may adversely affect
the coverage provided by subordination with respect to Bankruptcy Losses.
Any Fraud Loss will on each Distribution Date be allocated solely to the
outstanding Subordinate Certificates until the Fraud Coverage Termination Date.
The "Fraud Coverage Termination Date" is the Distribution Date upon which the
Fraud Loss Amount has been reduced to zero or a negative number (or the Cross-
Over Date, if earlier). Upon the initial issuance of the Certificates, the
"Fraud Loss Amount" will equal approximately 2.0% (approximately $3,842,550) of
the aggregate Scheduled Principal Balances of the Mortgage Loans as of the Cut-
off Date. As of any Distribution Date prior to the first anniversary of the Cut-
off Date, the Fraud Loss Amount will equal approximately $3,842,550, minus the
aggregate amount of Fraud Losses that would have been allocated to the
Subordinate Certificates in the absence of the Loss Allocation Limitation since
the Cut-off Date. As of any Distribution Date from the first through the fifth
anniversaries of the Cut-off Date, the Fraud Loss Amount will equal (1) the
lesser of (a) the Fraud Loss Amount as of the most recent anniversary of the
Cut-off Date and (b) 1.0% of the aggregate outstanding principal balance of all
of the Mortgage Loans as of the most recent anniversary of the Cut-off Date
minus (2) the Fraud Losses that would have been allocated to the Subordinate
Certificates in the absence of the Loss Allocation Limitation since the most
recent anniversary of the Cut-off Date. After the fifth anniversary of the Cut-
off Date, the Fraud Loss Amount shall be zero.
Any Special Hazard Loss will on each Distribution Date be allocated solely
to the outstanding Subordinate Certificates until the Special Hazard Termination
Date. The "Special Hazard Termination Date" is the Distribution Date
S-53
<PAGE>
upon which the Special Hazard Loss Amount has been reduced to zero or a negative
number (or the Cross-Over Date, if earlier). Upon the initial issuance of the
Certificates, the "Special Hazard Loss Amount" will equal approximately 1.0%
(approximately $1,921,275) of the aggregate Scheduled Principal Balances of the
Mortgage Loans as of the Cut-off Date. As of any Distribution Date, the Special
Hazard Loss Amount will equal approximately $1,921,275, minus the sum of (i) the
aggregate amount of Special Hazard Losses that would have been previously
allocated to the Subordinate Certificates in the absence of the Loss Allocation
Limitation and (ii) the Adjustment Amount. For each anniversary of the Cut-off
Date, the "Adjustment Amount" shall be equal to the amount, if any, by which the
Special Hazard Loss Amount (without giving effect to the deduction of the
Adjustment Amount for such anniversary) exceeds the lesser of (A) an amount
calculated by the Company and approved by each of S&P and Fitch, which amount
shall not be less than $500,000, and (B) the greater of (x) 1.0% (or if greater
than 1.0%, the highest percentage of Mortgage Loans by principal balance secured
by Mortgaged Properties in any California zip code) of the outstanding principal
balance of all the Mortgage Loans on the Distribution Date immediately preceding
such anniversary and (y) twice the outstanding principal balance of the Mortgage
Loan which has the largest outstanding principal balance on the Distribution
Date immediately preceding such anniversary.
Subordination
Priority of Senior Certificates. As of the Closing Date, the aggregate
Current Principal Amounts of all classes of Subordinate Certificates and the
Other Certificates will equal approximately 8.25% and 1.50%, respectively, of
the aggregate Current Principal Amounts of all Classes of Certificates. The
rights of the holders of each Class of Subordinate Certificates to receive
distributions with respect to the Group I Mortgage Loans and Group II Mortgage
Loans will be subordinated to such rights of the holders of the related Senior
Certificates and of each Class of Subordinate Certificates having a lower
numerical Class designation than such Class, to the extent described above. The
subordination of the Subordinate Certificates to the Senior Certificates, and
the further subordination among the Subordinate Certificates, are each intended
to increase the likelihood of timely receipt by the holders of the Certificates
with higher relative payment priorities of the maximum amount to which they are
entitled on any Distribution Date and to provide such holders protection against
losses resulting from defaults on the applicable Mortgage Loans to the extent
described above.
However, in certain circumstances, the amount of available subordination
(including the limited subordination provided for Excess Losses) may be
exhausted and shortfalls in distributions on the Offered Certificates could
result. Holders of Senior Certificates will bear their proportionate share of
Realized Losses in excess of the total subordination amount. The allocation of
the principal portion of the Non-PO Percentage of any Realized Loss, and of the
Class PO Deferred Payment Writedown Amount, to the Subordinate Certificates on
any Distribution Date will decrease the protection provided to the Senior
Certificates then outstanding on future Distribution Dates by reducing the
aggregate Current Principal Amount of the Subordinate Certificates then
outstanding.
In addition, in order to extend the period during which the Subordinate
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of any prepayment or other unscheduled recovery of principal
with respect to a Mortgage Loan will be allocated to the applicable Senior
Certificates to the extent described herein during the first five years after
the Closing Date (with such allocation being subject to reduction thereafter as
described herein). This allocation has the effect of accelerating the
amortization of the applicable Senior Certificates while, in the absence of
losses in respect of the related Mortgage Loans, increasing the percentage
interest in the principal balance of the related Mortgage Loans evidenced by the
Subordinate Certificates.
In certain other circumstances as described in paragraph (D) under "--
Distributions on the Certificates -- Allocation of Available Funds," Principal
Prepayments otherwise distributable to the Subordinate Certificates will in lieu
thereof be distributed to Senior Certificates.
After the payment of amounts distributable in respect of the Senior
Certificates on each Distribution Date, the Subordinate Certificates will be
entitled on such date to the remaining portion, if any, of the Group I Available
Funds and Group II Available Funds in an aggregate amount equal to the Accrued
Certificate Interest on the Subordinate Certificates for such date, any
remaining undistributed Accrued Certificate Interest thereon from previous
Distribution Dates and the sum of the Allocable Shares of the Subordinate
Certificates. Amounts so distributed to Subordinate Certificateholders will not
be available to cover any delinquencies or any Realized Losses on Mortgage Loans
in respect of subsequent Distribution Dates.
S-54
<PAGE>
Priority Among Subordinate Certificates. On each Distribution Date, the
holders of any particular Class of Subordinate Certificates will have a
preferential right to receive the amounts due them on such Distribution Date out
of Available Funds, prior to any distribution being made on such date on each
Class of Certificates subordinated to such Class. In addition, except as
described herein, the Non-PO Percentage of the principal portion of any Realized
Loss with respect to a Mortgage Loan and any Class PO Deferred Payment Writedown
Amount will be allocated, to the extent set forth herein, in reduction of the
Current Principal Amounts of the related Classes of Subordinate Certificates in
the inverse order of their numerical Class designation. The effect of the
allocation of such Realized Losses and of any Class PO Deferred Payment
Writedown Amount to a Class of Subordinate Certificates will be to reduce future
distributions allocable to such Class and increase the relative portion of
distributions allocable to more senior Classes of Subordinate Certificates.
In order to maintain the relative levels of subordination among the related
Classes of Subordinate Certificates, the applicable Non-PO Percentage of
prepayments and certain other unscheduled recoveries of principal in respect of
the Mortgage Loans (which generally will not be distributable to such
Certificates for at least the first five years) will not be distributable to the
holders of any Class of Subordinate Certificates on any Distribution Date for
which the related Class Prepayment Distribution Trigger is not satisfied, except
as described above. See "Description of the Certificates--Distributions on the
Certificates--Principal." If the Class Prepayment Distribution Trigger is not
satisfied with respect to any Class of Subordinate Certificates, the
amortization of more senior Classes of Subordinate Certificates may occur more
rapidly than would otherwise have been the case and, in the absence of losses in
respect of the Mortgage Loans, the percentage interest in the principal balance
of the Mortgage Loans evidenced by such Subordinate Certificates may increase.
As a result of the subordination of any Class of Subordinate Certificates,
such Class of Certificates will be more sensitive than more senior Classes of
Certificates to the rate of delinquencies and defaults on the Mortgage Loans,
and under certain circumstances investors in such Certificates may not recover
their initial investment.
YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and weighted average lives of the Certificates will
be affected by the amount and timing of principal payments on the Mortgage Loans
and the allocation of Available Funds to various Classes of Certificates.
Investors should carefully consider the associated risks discussed under the
headings "Yield and Prepayment Considerations" and "Legal Investment" in the
"Summary of Terms" herein and under the headings "Yield and Prepayment
Considerations" and "Legal Investment" in the Prospectus.
Assumed Final Distribution Date
The "Assumed Final Distribution Date" for distributions on the Certificates
is December 25, 2027. The Assumed Final Distribution Date is the first
anniversary of the Distribution Date immediately following the latest scheduled
maturity date of any Mortgage Loan. Since the rate of payment (including
prepayments) of principal on the Mortgage Loans can be expected to exceed the
scheduled rate of payments, and could exceed the scheduled rate by a substantial
amount, the disposition of the last remaining Mortgage Loan may be earlier, and
could be substantially earlier, than the Assumed Final Distribution Date. In
addition, the Master Servicer or its designee may, at its option, repurchase all
the Mortgage Loans from the Trust on or after any Distribution Date on which the
aggregate unpaid principal balance of the Mortgage Loans is less than 10% of the
aggregate Scheduled Principal Balance of the Mortgage Loans as of the Cut-off
Date. See "The Pooling and Servicing Agreement--Termination" herein.
S-55
<PAGE>
Weighted Average Lives
The weighted average life of a security refers to the average amount of time
that will elapse from the date of its issuance until each dollar of principal of
such security will be distributed to the investor. The weighted average life of
a Certificate is determined by (a) multiplying the amount of the reduction, if
any, of the principal balance of such Certificate from one Distribution Date to
the next Distribution Date by the number of years from the date of issuance to
the second such Distribution Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance of such
Certificate referred to in clause (a). The weighted average lives of the
Certificates will be influenced by, among other factors, the rate at which
principal is paid on Mortgage Loans in the applicable Mortgage Loan Group.
Principal payments of such Mortgage Loans may be in the form of scheduled
amortization or prepayments including as a result of foreclosure proceedings or
by virtue of the purchase of a Mortgage Loan in advance of its stated maturity
as required or permitted by the Agreement. In general, the Mortgage Loans may
be prepaid by the Mortgagors at any time without payment of any prepayment fee
or penalty. The actual weighted average life and term to maturity of each Class
of Certificates, in general, will be shortened if the level of such prepayments
of principal on the applicable Mortgage Loan Group increases.
The prepayment model used in this Prospectus Supplement (the "Prepayment
Assumption") represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. A 100%
Prepayment Assumption assumes a Constant Prepayment Rate ("CPR") of 4.0% per
annum of the then outstanding principal balance of such mortgage loans in the
first month of the life of the mortgage loans and an additional amount of
approximately 1.090909% (precisely 12/11%) per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of the mortgage loans, a 100% Prepayment Assumption
assumes a CPR of 16% per annum each month. As used in the table below, a 50%
Prepayment Assumption assumes prepayment rates equal to 50% of the Prepayment
Assumption. Correspondingly, a 150% Prepayment Assumption assumes prepayment
rates equal to 150% of the Prepayment Assumption, and so forth. The Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans.
Pricing Assumption
The Certificates were structured assuming, among other things, a 100%
Prepayment Assumption with respect to the Certificates. The prepayment
assumptions to be used for pricing purposes for the respective Classes may vary
as determined at the time of sale. The actual rate of prepayment may vary
considerably from the rate used for any prepayment assumption.
Decrement Tables
The following tables entitled "Percent of Initial Principal Amount
Outstanding" indicate the percentages of the initial principal amount (or
Notional Amount) of each Class of Offered Certificates that would be outstanding
after each of the dates shown at various constant percentages of the Prepayment
Assumption and the corresponding weighted average lives of such Classes of
Offered Certificates.
The following tables have been prepared based on the assumptions that: (i)
the Group I Mortgage Loans consist of four Mortgage Loans with the following
characteristics:
<TABLE>
<CAPTION>
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
- ------- ------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
$160,240,898.90 9.090500204% 8.825500204% 359 357
$10,197,742.84 9.011596666% 8.746596666% 179 177
$250,684.47 8.250000000% 7.985000000% 180 178
$1,847,119.25 8.250000000% 7.985000000% 360 359
</TABLE>
S-56
<PAGE>
(ii) the Group II Mortgage Loans consist of two Mortgage Loans with the
following characteristics:
<TABLE>
<CAPTION>
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
- ------- ------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
$ 19,016,874.96 10.402368280% 10.137368280% 360 357
$ 574,159.43 10.676721351% 10.411721351% 179 177
</TABLE>
(iii) the Mortgage Loans prepay at the specified constant percentages of the
Prepayment Assumption, (iv) no defaults in the payment by Mortgagors of
principal of and interest on the Mortgage Loans are experienced, (v) scheduled
payments on the Mortgage Loans are received on the first day of each month
commencing in January 1997 and are computed prior to giving effect to
prepayments received on the last day of the prior month, (vi) prepayments are
allocated as described herein without giving effect to loss and delinquency
tests, (vii) there are no Net Interest Shortfalls and prepayments represent
prepayments in full of individual Mortgage Loans and are received on the last
day of each month, commencing in December 1996, (viii) the scheduled monthly
payment for each Mortgage Loan has been calculated based on its outstanding
balance, interest rate and remaining term to maturity such that each Mortgage
Loan will amortize in amounts sufficient to repay the balance of such Mortgage
Loan by its remaining term to maturity, (ix) the initial principal or notional
amounts of the Certificates are as set forth on the cover page hereof and under
"Summary of Terms--Other Certificates," (x) interest accrues on each Class of
Certificates at the applicable interest rate or in the amounts described herein
or in the case of the Class A-I-7 and Class A-I-8 Certificates, at their initial
rates, (xi) distributions in respect of the Certificates are received in cash on
the 25th day of each month, commencing in January 1997, (xii) the Offered
Certificates are purchased on December 23, 1996 and (xiii) the Master Servicer
does not exercise the option to repurchase the Mortgage Loans described under
the caption "The Pooling and Servicing Agreement--Termination." While it is
assumed that each of the Mortgage Loans prepays at the specified constant
percentages of the Prepayment Assumption, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual Mortgage
Loans that will be delivered to the Trustee and the characteristics of the
Mortgage Loans assumed in preparing the tables. To the extent that the Mortgage
Loans have characteristics which differ from those assumed in preparing the
tables, the Certificates may mature earlier or later than indicated by the
tables.
Based on the foregoing assumptions, the tables below indicate the weighted
average life of each Class of Offered Certificates (other than the Class A-I-8
and Class X Certificates) and set forth the percentages of the initial Current
Principal Amount of each such Class that would be outstanding after the
Distribution Date in December of each of the years indicated, assuming that the
Mortgage Loans prepay at the percentage of the Prepayment Assumption indicated
therein. Neither the Prepayment Assumption nor any other prepayment model or
assumption purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. Variations in the actual prepayment experience
and the balance of the Mortgage Loans that prepay may increase or decrease the
percentage of initial Current Principal Amount (and weighted average life) shown
in the following tables. Such variations may occur even if the average
prepayment experience of all such Mortgage Loans equals any of the specified
percentages of the Prepayment Assumption.
S-57
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-1 CLASS A-I-2
CERTIFICATES CERTIFICATES
---------------------- ----------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
---------------------- ----------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
- ------ --- --- ---- ---- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................... 100 100 100 100 100 100 100 100 100 100
December 1997..................... 74 63 51 40 28 80 71 61 52 43
December 1998..................... 43 18 0 0 0 55 36 19 9 6
December 1999..................... 14 0 0 0 0 32 12 5 1 0
December 2000..................... 0 0 0 0 0 15 5 0 0 0
December 2001..................... 0 0 0 0 0 8 * 0 0 0
December 2002..................... 0 0 0 0 0 4 0 0 0 0
December 2003..................... 0 0 0 0 0 2 0 0 0 0
December 2004..................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (years)**... 1.8 1.3 1.1 0.9 0.8 2.5 1.8 1.4 1.2 1.0
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-58
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-3 CLASS A-I-4
CERTIFICATES CERTIFICATES
---------------------- ----------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
---------------------- ----------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
- ------ --- --- ---- ---- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................... 100 100 100 100 100 100 100 100 100 100
December 1997..................... 100 100 100 100 100 100 100 100 100 100
December 1998..................... 100 100 80 0 0 100 100 100 96 60
December 1999..................... 100 18 0 0 0 100 100 55 8 0
December 2000..................... 48 0 0 0 0 100 51 0 0 0
December 2001..................... 0 0 0 0 0 79 2 0 0 0
December 2002..................... 0 0 0 0 0 46 0 0 0 0
December 2003..................... 0 0 0 0 0 17 0 0 0 0
December 2004..................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (years)**... 4.0 2.8 2.2 1.8 1.5 6.0 4.1 3.1 2.6 2.2
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-59
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-5 CLASS A-I-6
CERTIFICATES CERTIFICATES
---------------------- -----------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
---------------------- -----------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
- ------ --- --- ---- ---- ---- ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
December 1997........... 100 100 100 100 100 100 100 100 100 100
December 1998........... 100 100 100 100 100 100 100 100 100 100
December 1999........... 100 100 100 100 38 100 100 100 100 100
December 2000........... 100 100 84 0 0 100 100 100 91 0
December 2001........... 100 100 0 0 0 100 100 89 0 0
December 2002........... 100 40 0 0 0 100 100 7 0 0
December 2003........... 100 0 0 0 0 100 85 0 0 0
December 2004........... 89 0 0 0 0 100 35 0 0 0
December 2005........... 55 0 0 0 0 100 0 0 0 0
December 2006........... 28 0 0 0 0 100 0 0 0 0
December 2007........... 2 0 0 0 0 100 0 0 0 0
December 2008........... 0 0 0 0 0 73 0 0 0 0
December 2009........... 0 0 0 0 0 44 0 0 0 0
December 2010........... 0 0 0 0 0 18 0 0 0 0
December 2011........... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 9.3 5.9 4.4 3.6 3.0 12.9 7.8 5.5 4.4 3.6
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-60
<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-7 AND A-I-8
CERTIFICATES CLASS A-I-9 CERTIFICATES
---------------------- ------------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
---------------------- ------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
- ------ --- --- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................ 100 100 100 100 100 100 100 100 100 100
December 1997.................. 91 86 82 78 74 100 100 100 100 100
December 1998.................. 79 70 61 53 45 100 100 100 100 100
December 1999.................. 68 56 44 34 24 100 100 100 100 100
December 2000.................. 58 43 30 18 8 100 100 100 100 90
December 2001.................. 50 32 18 7 0 100 100 100 73 0
December 2002.................. 42 24 10 1 0 100 100 100 13 0
December 2003.................. 36 18 5 0 0 100 100 56 0 0
December 2004.................. 30 13 2 0 0 100 100 25 0 0
December 2005.................. 26 9 1 0 0 100 99 6 0 0
December 2006.................. 23 7 0 0 0 100 78 0 0 0
December 2007.................. 19 5 0 0 0 100 60 0 0 0
December 2008.................. 16 4 0 0 0 100 44 0 0 0
December 2009.................. 14 3 0 0 0 100 30 0 0 0
December 2010.................. 11 2 0 0 0 100 18 0 0 0
December 2011.................. 9 1 0 0 0 96 7 0 0 0
December 2012.................. 7 0 0 0 0 80 0 0 0 0
December 2013.................. 6 0 0 0 0 64 0 0 0 0
December 2014.................. 5 0 0 0 0 51 0 0 0 0
December 2015.................. 3 0 0 0 0 38 0 0 0 0
December 2016.................. 2 0 0 0 0 26 0 0 0 0
December 2017.................. 1 0 0 0 0 15 0 0 0 0
December 2018.................. * 0 0 0 0 5 0 0 0 0
December 2019.................. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**..................... 6.5 4.3 3.1 2.4 2.1 18.3 11.9 7.4 5.4 4.4
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
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<PAGE>
<TABLE>
<CAPTION>
CLASS A-I-10 CLASS A-I-11
CERTIFICATES CERTIFICATES
------------------------ ------------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
------------------------ ------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
- ------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.......... 100 100 100 100 100 100 100 100 100 100
December 1997............ 100 100 100 100 100 100 100 100 100 100
December 1998............ 100 100 100 100 100 100 100 100 100 100
December 1999............ 100 100 100 100 100 100 100 100 100 100
December 2000............ 100 100 100 100 100 100 100 100 100 100
December 2001............ 100 100 100 100 82 100 100 100 100 100
December 2002............ 100 100 100 100 0 97 95 94 92 85
December 2003............ 100 100 100 49 0 93 89 86 82 57
December 2004............ 100 100 100 13 0 87 81 75 69 39
December 2005............ 100 100 100 * 0 80 72 64 56 27
December 2006............ 100 100 92 * 0 72 62 53 43 20
December 2007............ 100 100 76 * 0 65 53 43 34 15
December 2008............ 100 100 62 * 0 58 46 35 26 11
December 2009............ 100 100 50 * 0 52 39 29 20 8
December 2010............ 100 100 41 * 0 46 33 23 16 6
December 2011............ 100 100 33 * 0 41 28 19 12 4
December 2012............ 100 97 27 * 0 36 24 15 9 3
December 2013............ 100 82 22 * 0 32 20 12 7 2
December 2014............ 100 69 17 * 0 28 17 10 6 2
December 2015............ 100 58 14 * 0 25 14 8 4 1
December 2016............ 100 48 11 * 0 21 12 6 3 1
December 2017............ 100 39 9 * 0 18 10 5 2 1
December 2018............ 100 32 7 * 0 16 8 4 2 *
December 2019............ 91 25 5 * 0 13 6 3 1 *
December 2020............ 74 20 4 * 0 11 5 2 1 *
December 2021............ 59 15 3 * 0 8 4 2 1 *
December 2022............ 45 11 2 * 0 6 3 1 * *
December 2023............ 31 7 1 * 0 4 2 1 * *
December 2024............ 19 4 1 * 0 3 1 * * *
December 2025............ 8 2 * * 0 1 * * * *
December 2026............ 0 0 0 0 0 0 0 0 0 0
December 2027............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**............... 25.8 20.6 14.3 7.2 5.4 14.7 12.8 11.4 10.4 8.4
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
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<PAGE>
<TABLE>
<CAPTION>
CLASS A-II
CERTIFICATES CLASS PO CERTIFICATES
---------------------- ----------------------
% OF PREPAYMENT % OF PREPAYMENT
ASSUMPTION ASSUMPTION
---------------------- ----------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
- ------ --- --- ---- ---- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................... 100 100 100 100 100 100 100 100 100 100
December 1997..................... 93 89 86 82 79 93 91 88 85 82
December 1998..................... 84 77 70 63 57 85 79 73 67 62
December 1999..................... 76 66 57 49 41 77 68 60 53 46
December 2000..................... 68 57 46 37 29 70 59 50 42 35
December 2001..................... 62 48 37 27 20 63 51 41 33 26
December 2002..................... 56 41 30 21 13 57 44 34 26 19
December 2003..................... 50 35 24 15 9 51 38 28 20 14
December 2004..................... 45 30 19 12 6 46 33 23 16 11
December 2005..................... 41 26 16 9 4 41 28 19 12 8
December 2006..................... 37 23 13 7 3 37 24 15 10 6
December 2007..................... 34 20 11 6 2 33 21 13 7 4
December 2008..................... 30 17 9 4 2 29 17 10 6 3
December 2009..................... 27 14 7 3 1 26 15 8 4 2
December 2010..................... 24 12 6 3 1 23 12 7 3 2
December 2011..................... 22 11 5 2 1 20 10 5 3 1
December 2012..................... 19 9 4 2 1 18 9 4 2 1
December 2013..................... 17 8 3 1 * 16 7 3 2 1
December 2014..................... 15 6 3 1 * 14 6 3 1 *
December 2015..................... 13 5 2 1 * 12 5 2 1 *
December 2016..................... 12 5 2 1 * 10 4 2 1 *
December 2017..................... 10 4 1 * * 9 4 1 * *
December 2018..................... 9 3 1 * * 8 3 1 * *
December 2019..................... 7 2 1 * * 6 2 1 * *
December 2020..................... 6 2 1 * * 5 2 1 * *
December 2021..................... 5 1 * * * 4 1 * * *
December 2022..................... 4 1 * * * 3 1 * * *
December 2023..................... 3 1 * * * 2 1 * * *
December 2024..................... 2 * * * * 1 * * * *
December 2025..................... 1 * * * * 1 * * * *
December 2026..................... 0 0 0 0 0 0 0 0 0 0
December 2027..................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (years)**... 9.2 6.7 5.1 4.0 3.2 9.2 6.9 5.5 4.5 3.8
</TABLE>
- --------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
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<PAGE>
<TABLE>
<CAPTION>
CLASS B-1, B-2 AND B-3 CLASS R-1 AND R-
CERTIFICATES 2 CERTIFICATES
------------------------ -------------------------------
% OF PREPAYMENT
ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------ -------------------------------
PERIOD 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
- ------ ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent......... 100 100 100 100 100 100 100 100 100 100
December 1997........... 99 99 99 99 99 0 0 0 0 0
December 1998........... 98 98 98 98 98 0 0 0 0 0
December 1999........... 97 97 97 97 97 0 0 0 0 0
December 2000........... 96 96 96 96 96 0 0 0 0 0
December 2001........... 95 95 95 95 95 0 0 0 0 0
December 2002........... 91 90 89 88 86 0 0 0 0 0
December 2003........... 87 84 82 79 76 0 0 0 0 0
December 2004........... 81 77 72 68 64 0 0 0 0 0
December 2005........... 75 68 62 56 50 0 0 0 0 0
December 2006........... 67 59 51 44 37 0 0 0 0 0
December 2007........... 60 50 42 34 28 0 0 0 0 0
December 2008........... 54 43 34 27 20 0 0 0 0 0
December 2009........... 48 37 28 21 15 0 0 0 0 0
December 2010........... 43 31 23 16 11 0 0 0 0 0
December 2011........... 38 27 18 12 8 0 0 0 0 0
December 2012........... 34 23 15 10 6 0 0 0 0 0
December 2013........... 30 19 12 7 4 0 0 0 0 0
December 2014........... 26 16 10 6 3 0 0 0 0 0
December 2015........... 23 13 8 4 2 0 0 0 0 0
December 2016........... 20 11 6 3 2 0 0 0 0 0
December 2017........... 17 9 5 2 1 0 0 0 0 0
December 2018........... 15 7 4 2 1 0 0 0 0 0
December 2019........... 12 6 3 1 1 0 0 0 0 0
December 2020........... 10 5 2 1 * 0 0 0 0 0
December 2021........... 8 4 2 1 * 0 0 0 0 0
December 2022........... 6 3 1 * * 0 0 0 0 0
December 2023........... 4 2 1 * * 0 0 0 0 0
December 2024........... 3 1 * * * 0 0 0 0 0
December 2025........... 1 * * * * 0 0 0 0 0
December 2026........... 0 0 0 0 0 0 0 0 0 0
December 2027........... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**.............. 13.9 12.3 11.1 10.2 9.6 0.1 0.1 0.1 0.1 0.1
</TABLE>
- --------
* Less than 0.5 but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
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<PAGE>
Yield on Class PO Certificates
The Class PO Certificates will be "principal only" certificates, will not bear
interest and will be offered at a substantial discount to their original
principal amount. As indicated in the table below a low rate of principal
payments (including prepayments) will have a material negative effect on the
yield to investors in the Class PO Certificates.
The significance of the effects of prepayments on the Class PO Certificates is
illustrated in the following table entitled "Sensitivity of the Class PO
Certificates to Prepayments," which shows the pre-tax yield (on a corporate bond
equivalent basis) to the holders of such Certificates under different constant
percentages of the Prepayment Assumption. The yields of such Certificates set
forth in the following table were calculated using the assumptions specified
above under "--Decrement Tables" and assuming that the purchase price of the
Class PO Certificates is approximately $2,360 for 100% of such Class of
Certificates and such Certificates are purchased on December 23, 1996.
It is not likely that the Group I Mortgage Loans will prepay at a constant
rate until maturity or that all of the Group I Mortgage Loans will prepay at the
same rate or that they will have the characteristics assumed. There can be no
assurance that the Group I Mortgage Loans will prepay at any of the rates shown
in the table or at any other particular rate. The timing of changes in the rate
of prepayments may affect significantly the yield realized by a holder of a
Class PO Certificate and there can be no assurance that the pre-tax yield to an
investor in the Class PO Certificates will correspond to any of the pre-tax
yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class PO Certificate.
Sensitivity of the Class PO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
% of Prepayment Assumption
------------------------------------
50% 75% 100% 125% 150%
--- --- ---- ---- ----
Pre-Tax Yields to Maturity............ 6.8 9.2 11.8 14.5 17.3
The yields set forth in the preceding table were calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flows
to be paid on the Class PO Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
of the Class PO Certificates indicated above and converting such monthly rates
to corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments on the Class PO Certificates and
consequently does not purport to reflect the return on any investment in the
Class PO Certificates when such reinvestment rates are considered.
Yield on Class A-I-8 Certificates
The significance of the effects of prepayments and changes in LIBOR on the
Class A-I-8 Certificates is illustrated in the following table entitled
"Sensitivity of the Class A-I-8 Certificates to Prepayments and LIBOR," which
shows the pre-tax yield (on a corporate bond equivalent basis) to the holders of
such Certificates under different constant percentages of the Prepayment
Assumption and levels of LIBOR. The yields of such Certificates set forth in the
following table were calculated using the assumptions specified above under "---
Decrement Tables" and assuming that (i) on the LIBOR Determination Date in
January 1997 and on each LIBOR Determination Date thereafter, LIBOR will be at
the level shown, (ii) the purchase price of the Class A-I-8 Certificates is
approximately $2,598,345 for 100% of such Class of Certificates and (iii) such
Certificates are purchased on December 23, 1996.
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<PAGE>
The yield to investors in the Class A-I-8 Certificates will be highly
sensitive to the level of LIBOR and to the rate and timing of principal payments
(including prepayments) of the Mortgage Loans, which generally can be prepaid at
any time. In particular, a high rate of principal payments (including
prepayments) and/or a high level of LIBOR will have a material negative effect
on the yield to investors in the Class A-I-8 Certificates. Under certain
circumstances, investors in the Class A-I-8 Certificates could fail to recover
fully their initial investments.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased level of LIBOR.
Sensitivity of the Class A-I-8 Certificates
to Prepayments and LIBOR
(Pre-Tax Yields to Maturity)
% of Prepayment Assumption
-------------------------------------------
LIBOR 50% 75% 100% 125% 150%
- ------------------ --- --- ---- ---- ----
3.375% 123.1% 115.3% 106.9% 98.0% 88.6%
5.375% 66.1% 58.4% 49.7% 40.3% 30.2%
7.375% 13.6% 4.5% (7.4)% (20.1)% (32.2)%
8.550% * * * * *
- ------------------
* The Pre-Tax Yield to maturity will be less than (99.9)%
The yields set forth in the preceding table were calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flows
to be paid on the Class A-I-8 Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
of the Class A-I-8 Certificates indicated above and converting such monthly
rates to corporate bond equivalent rates. Such calculation does not take into
account variations that may occur in the interest rates at which investors may
be able to reinvest funds received by them as payments of principal of and
interest on the Class A-I-8 Certificates and consequently does not purport to
reflect the return on any investment in the Class A-I-8 Certificates when such
reinvestment rates are considered.
Yield on Class X Certificates
The significance of the effects of prepayments on the Class X Certificates is
illustrated in the following table entitled "Sensitivity of the Class X
Certificates to Prepayments," which shows the pre-tax yield (on a corporate bond
equivalent basis) to holders of such Certificates under different constant
percentages of the Prepayment Assumption. The yields of such Certificates set
forth in the following table were calculated using the assumptions specified
above under "--Decrement Tables" and assuming that the purchase price including
accrued interest of the Class X Certificates is approximately $6,365,759 for
100% of such Class of Certificates and such Certificates are purchased on
December 23, 1996.
As indicated in the following table, the yield to investors in the Class X
Certificates will be highly sensitive to the rate of principal payments
(including prepayments) of the Mortgage Loans (especially those with high Net
Rates), which generally can be prepaid at any time. On the basis of the
assumptions described above, the yield to maturity on the Class X Certificates
would be 0% if prepayments were to occur at a constant rate of approximately
175% of the Prepayment Assumption. Using such assumptions, if the actual
prepayment rate of the Mortgage Loans were to exceed the foregoing rate for as
little as one month (while equaling such rate for all other months), investors
in the Class X Certificates would not recover fully their initial investments.
It is not likely that the Mortgage Loans will prepay at a constant rate until
maturity or that all of the Mortgage Loans will prepay at the same rate or that
they will have the characteristics assumed. There can be no
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<PAGE>
assurance that the Mortgage Loans will prepay at any of the rates shown in the
table or at any other particular rate. The timing of changes in the rate of
prepayments may affect significantly the yield realized by a holder of a Class X
Certificate and there can be no assurance that the pre-tax yield to an investor
in the Class X Certificates will correspond to any of the pre-tax yields shown
herein. Each investor must make its own decision as to the appropriate
prepayment assumptions to be used in deciding whether or not to purchase a Class
X Certificate.
Sensitivity of the Class X
Certificates to Prepayments
(Pre-Tax Yields to Maturity)
% of Prepayment Assumption
-------------------------------------
50% 75% 100% 125% 200%
--- --- ---- ---- ----
Pre-Tax Yields to Maturity........ 23.4 19.0 14.4 9.7 (5.2)
The yields set forth in the preceding table were calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flows
to be paid on the Class X Certificates, would cause the discounted present value
of such assumed stream of cash flows to equal the assumed purchase price of the
Class X Certificates indicated above and converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments of interest on the Class X
Certificates and consequently does not purport to reflect the return on any
investment in the Class X Certificates when such reinvestment rates are
considered.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Agreement. Reference is made
to the Prospectus for important information additional to that set forth herein
regarding the terms and conditions of the Agreement and the Certificates. BSMSI
will provide to a prospective or actual Certificateholder without charge, upon
written request, a copy (without exhibits) of the Agreement. Requests should be
addressed to Bear Stearns Mortgage Securities Inc., 245 Park Avenue, New York,
New York 10167.
Voting Rights
Voting rights of the Trust in general will be allocated 1% to the Class A-I-8
and Class X Certificates with the balance allocated among the Classes of
Certificates based upon their respective Current Principal Amounts. Voting
rights of the Class A-I-8 and Class X Certificates will be allocated pro rata
based on the Class A-I-8 Notional Amount and the Class X Notional Amount.
Assignment of Mortgage Loans
At the time of issuance of the Certificates, BSMSI will cause the Mortgage
Loans, together with all principal and interest due on or with respect to such
Mortgage Loans after the Cut-off Date, to be sold to the Trustee. The Mortgage
Loans will be identified in a schedule appearing as an exhibit to the Agreement
with the Group I Mortgage Loans and the Group II Mortgage Loans separately
identified. Such schedule will include information as to the principal balance
of each Mortgage Loan as of the Cut-off Date, as well as information including,
among other things, the Mortgage Rate, the Net Rate, the Monthly Payment, the
maturity date of each Mortgage Note, and the Loan-to-Value Ratio.
In addition, BSMSI will deposit with the Trustee, with respect to each
Mortgage Loan, the original Mortgage Note, endorsed without recourse to the
order of the Trustee and showing an unbroken chain of
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<PAGE>
endorsements from the original payee thereof to the person endorsing it to the
Trustee; the original Mortgage which shall have been recorded, with evidence of
such recording indicated thereon; the assignment (which may be in the form of a
blanket assignment) to the Trustee of the Mortgage, with evidence of recording
with respect to each Mortgage Loan in the name of the Trustee thereon; all
intervening assignments of the Mortgage, if any, with evidence of recording
thereon; the original or a copy of the policy or certificate of primary mortgage
guaranty insurance, if any; the original policy of title insurance or
mortgagee's certificate of title insurance or commitment or binder for title
insurance; originals of all assumption and modification agreements; provided,
however, that in lieu of the foregoing, BSMSI may deliver certain other
documents, under the circumstances set forth in the Agreement. The documents
delivered to the Trustee with respect to each Mortgage Loan are referred to
collectively as the "Mortgage File." The Master Servicer will cause the Mortgage
and intervening assignments, if any, and the assignment of the Mortgage to be
recorded not later than 180 days after the Closing Date.
The Trustee will review each item of the Mortgage File within 45 days of the
Closing Date (and will review each document permitted to be delivered to the
Trustee after the Closing Date, if received by the Trustee after the initial 45-
day period, promptly after its delivery to the Trustee). If, as a result of its
review, the Trustee determines that any document is missing, does not appear
regular on its face, or appears to be unrelated to the Mortgage Loans identified
in the Mortgage Loan schedules (a "Material Defect"), the Trustee shall notify
ICI Funding of such Material Defect. ICI Funding shall correct or cure any such
Material Defect within 60 days from the date of notice from the Trustee of the
Material Defect and if ICI Funding does not correct or cure such Material Defect
within such period and such defect materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan, ICI Funding
will, within 90 days of the date of notice, provide the Trustee with a
substitute Mortgage Loan (if within two years of the Closing Date) or purchase
the related Mortgage Loan at the applicable Repurchase Price.
The Trustee also will review the Mortgage Files within 180 days of the Closing
Date. If the Trustee discovers a Material Defect, the Trustee shall notify ICI
Funding of such Material Defect. ICI Funding shall correct or cure any such
Material Defect within 60 days from the date of notice from the Trustee of the
Material Defect and if ICI Funding does not correct or cure such Material Defect
within such period and such defect materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan, ICI Funding
will, within 90 days of the date of notice, provide the Trustee with a
substitute Mortgage Loan (if within two years of the Closing Date) or purchase
the related Mortgage Loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan required to be
repurchased, an amount equal to (i) 100% of the Outstanding Principal Balance of
such Mortgage Loan plus accrued but unpaid interest on the Outstanding Principal
Balance at the related Mortgage Rate through and including the last day of the
month of repurchase reduced by (ii) any portion of the Master Servicing Fee (as
defined under "--Servicing Compensation and Payment of Expenses" herein) or
advances payable to the purchaser of the Mortgage Loan.
As of any time of determination, the "Outstanding Principal Balance" of a
Mortgage Loan is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor or, in the case of an REO Property, the principal balance
of the related Mortgage Loan remaining to be paid by the Mortgagor at the time
such property was acquired by the Trust less any Net Insurance Proceeds with
respect thereto to the extent applied to the principal.
Representations and Warranties
In the purchase agreement pursuant to which BSMSI purchased the Mortgage
Loans, ICI Funding made certain representations and warranties to BSMSI
concerning the Mortgage Loans. BSMSI will assign to the Trustee all of its
right, title and interest in such purchase agreement insofar as it relates to
such representations and warranties, as well as the repurchase and substitution
remedies provided for breach of such representations and warranties. The
representations and warranties of ICI Funding include, among other things, that
as of the Closing Date or such other date as may be specified below:
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<PAGE>
(a) the information set forth and to be set forth in the Mortgage Loan
schedules delivered and to be delivered to the Trustee was and will be true and
correct in all material respects at the date or dates respecting which such
information is furnished;
(b) each Mortgage relating to a Mortgage Loan is a valid and enforceable first
lien on the property securing the related Mortgage Note and each Mortgaged
Property is owned by the Mortgagor in fee simple (except with respect to common
areas in the case of condominiums, PUDs and de minimis PUDs) or by leasehold for
a term longer than the term of the related Mortgage, subject only to certain
permitted exceptions;
(c) as of the Cut-off Date, no payment of principal of or interest on or in
respect of any Mortgage Loan is 30 or more days past due:
(d) there is no valid offset, defense or counterclaim to any Mortgage Note or
Mortgage, including the obligation of the Mortgagor to pay the unpaid principal
and interest on such Mortgage Note;
(e) a lender's title insurance policy (on an ALTA or CLTA form) or binder, or
other assurance of title customary in the relevant jurisdiction therefor, was
issued on the date of the origination of each Mortgage Loan, each such policy,
binder or assurance is valid and remains in full force and effect;
(f) at the time of origination of the Mortgage Loans, at least 93.75% of the
Group I Mortgage Loans and 69.78% of the Group II Mortgage Loans (by aggregate
principal balance), respectively, will be secured by Mortgages on properties
which were owner-occupied primary residences;
(g) the improvements on each Mortgaged Property securing such Mortgage Loan is
insured (by an insurer which is acceptable to ICI Funding) against loss by fire
and such hazards as are covered under a standard extended coverage endorsement
in the locale where the Mortgaged Property is located, in an amount which is not
less than the lesser of the maximum insurable value of the improvements securing
such Mortgage Loan and the outstanding principal balance of the Mortgage Loan
but in no event in an amount less than an amount that is required to prevent the
Mortgagor from being deemed to be a co-insurer thereunder; if the improvement on
the Mortgaged Property is a condominium unit, it is included under the coverage
afforded by a blanket policy for the condominium project; if upon origination of
the Mortgage Loan, the improvements on the Mortgaged Property were in an area
identified as a federally designated flood area, a flood insurance policy is in
effect in an amount representing coverage not less than the least of (i) the
outstanding principal balance of the Mortgage Loan, (ii) the restorable cost of
improvements located on such Mortgaged Property and (iii) the maximum coverage
available under federal law; and each Mortgage obligates the Mortgagor
thereunder to maintain the insurance referred to above at the Mortgagor's cost
and expense;
(h) there is no material monetary default existing under any Mortgage or the
related Mortgage Note and there is no material event which, with the passage of
time or with notice and the expiration of any grace or cure period, would
constitute a default, breach or event of acceleration; and neither ICI Funding
nor any of its affiliates has taken any action to waive any default, breach or
event of acceleration; no foreclosure action is threatened or has been commenced
with respect to the Mortgage Loan; and
(i) no Mortgagor, at the time of origination of the applicable Mortgage, was a
debtor in any state or federal bankruptcy or insolvency proceeding.
Upon discovery or receipt of notice by ICI Funding, BSMSI or the Trustee of a
breach of any representation or warranty relating to the Mortgage Loans which
materially and adversely affects the value of the interests of
Certificateholders or the Trustee in any of the Mortgage Loans, the party
discovering or receiving notice of such breach shall give prompt written notice
to the others. In the case of any such breach, within 60 days
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<PAGE>
from the date of discovery by ICI Funding, or the date ICI Funding is notified
by the party discovering or receiving notice of such breach (whichever occurs
earlier), ICI Funding will (i) cure such breach in all material respects, (ii)
purchase the affected Mortgage Loan at the applicable Repurchase Price (or, if
such Mortgage Loan or the related Mortgaged Property acquired in respect thereof
has been sold, pay the excess of the Repurchase Price over the Net Liquidation
Proceeds (as defined herein)) to the Trust or (iii) if within two years of the
Closing Date, substitute a qualifying substitute Mortgage Loan in exchange for
such Mortgage Loan. The obligations of ICI Funding to cure, purchase or
substitute a qualifying substitute Mortgage Loan shall constitute the
Certificateholders' sole and exclusive remedy respecting a breach of such
representations or warranties.
Collection and Other Servicing Procedures
The Master Servicer will use its reasonable efforts to ensure that all
payments required under the terms and provisions of the Mortgage Loans are
collected, and shall follow collection procedures comparable to the collection
procedures of prudent mortgage lenders servicing mortgage loans for their own
account, to the extent such procedures shall be consistent with the Agreement.
Consistent with the foregoing, the Master Servicer may in its discretion (i)
waive or permit to be waived any late payment or prepayment charge, assumption
fee or any penalty interest in connection with the prepayment of a Mortgage Loan
and (ii) suspend or reduce or permit to be suspended or reduced regular monthly
payments for a period of up to six months or arrange or permit an arrangement
with a Mortgagor for a schedule for the liquidation of delinquencies. In the
event the Master Servicer shall consent to the deferment of due dates for
payments due on a Mortgage Note, the Master Servicer shall nonetheless continue
to make advances as described herein to the same extent as if such installment
were due, owing and delinquent and had not been deferred through liquidation of
the Mortgaged Property, but the obligation of the Master Servicer to advance
shall apply only to the extent that the Master Servicer believes, in good faith,
that such advances are recoverable from future payments on any Mortgage Loan.
If a Mortgaged Property has been or is about to be conveyed by the Mortgagor
and the Master Servicer has knowledge thereof, the Master Servicer will
accelerate the maturity of the Mortgage Loan, to the extent permitted by the
terms of the related Mortgage Note and applicable law. If it reasonably believes
that the due-on-sale clause cannot be enforced under applicable law, the Master
Servicer may enter into an assumption agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Mortgage Note and the Mortgagor, to the extent
permitted by applicable law, remains liable thereon. The Master Servicer will
retain any fee collected for entering into an assumption agreement, as
additional servicing compensation. In regard to circumstances in which the
Master Servicer may be unable to enforce due-on-sale clauses, see "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale Clauses" in the Prospectus. In connection
with any such assumption, the Mortgage Rate borne by the related Mortgage Note
may not be changed. No Mortgage Loan may be assumed unless coverage under any
existing Primary Insurance Policy continues as to that Mortgage Loan after such
assumption.
The Master Servicer, and any permitted sub-servicer, will establish and
maintain, in addition to the Protected Account described below under "--
Protected Account," one or more accounts (each, a "Servicing Account") in a
depository institution the deposits of which are insured by the FDIC to the
maximum extent permitted by law. The Master Servicer or such sub-servicers will
deposit and retain therein all collections from the Mortgagors for the payment
of taxes, assessments, insurance premiums, or comparable items as agent of the
Mortgagors and in trust as provided in the Agreement. Amounts in any Servicing
Account may relate to mortgage loans in more than one mortgage pool or to
mortgage loans not yet included in a mortgage pool. Each Servicing Account
shall be fully insured by the FDIC and to the extent that the balance in such
account exceeds the limits of such insurance, such excess must be transferred to
another fully-insured account in another institution the accounts of which are
insured by the FDIC or must be invested in certain investments permitted by the
Agreement ("Permitted Investments"). Such Permitted Investments must be held in
trust by the Master Servicer or such sub-servicers, as described above. In
addition, the Master Servicer may permit a sub-servicer to establish Servicing
Accounts not conforming to the foregoing requirements to the extent that such
Servicing Accounts meet the requirements of each of the Rating Agencies for the
maintenance of the ratings on the Certificates. Withdrawals of amounts from the
Servicing Accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse the Master
Servicer or any sub-servicer for
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any advances made with respect to such items, to refund to any Mortgagors any
sums as may be determined to be overages, to pay interest, if required, to
Mortgagors on balances in the Servicing Accounts, to pay earnings not required
to be paid to Mortgagors to the Master Servicer or the related sub-servicer or
to clear and terminate the Servicing Accounts at or at any time after the
termination of the Agreement.
For each Mortgage Loan which as of the Cut-off Date was covered by a Primary
Insurance Policy, the Master Servicer will maintain and keep, or cause to be
maintained and kept, with respect to each such Mortgage Loan, in full force and
effect a Primary Insurance Policy with respect to the portion of each such
Mortgage Loan, if any, in excess at origination of the percentage of value set
forth under "Description of the Mortgage Loans--General" herein, at least until
such excess has been eliminated. Pursuant to applicable state law, the Master
Servicer may permit the Primary Insurance Policy to be terminated if a
reappraisal of the Mortgaged Property indicates a new appraised value of which
the then outstanding principal balance of the Mortgage Loan does not exceed 80%.
Primary Insurance Policies may be replaced by substantially equivalent insurance
but such replacement is subject to the condition, to be evidenced by a writing
from each Rating Agency, that it would not cause the ratings on the Certificates
to be downgraded or withdrawn.
The Master Servicer will require each sub-servicer to maintain errors and
omissions insurance and fidelity bonds in certain specified amounts.
Hazard Insurance
The Master Servicer will maintain and keep, or cause to be maintained and
kept, with respect to each Mortgage Loan, in full force and effect for each
Mortgaged Property a hazard insurance policy equal to at least the lesser of the
Outstanding Principal Balance of the Mortgage Loan or the current replacement
cost of the Mortgaged Property and containing a standard mortgagee clause;
provided, however, that the amount of hazard insurance may not be less than the
amount necessary to prevent loss due to the application of any co-insurance
provision of the related policy. Unless a higher deductible is required by law,
the deductible on such hazard insurance policy may be no more than $1,000 or 1%
of the applicable amount of coverage, whichever is less. In the case of a
condominium unit or a unit in a planned unit development, required hazard
insurance will take the form of a multiperil policy covering the entire
condominium project or planned unit development, in an amount equal to at least
100% of the insurable value based on replacement cost. Any amounts collected by
the Master Servicer under any such hazard insurance policy (other than amounts
to be applied to the restoration or repair of the Mortgaged Property or amounts
released to the Mortgagor in accordance with normal servicing procedures) shall
be deposited in a Protected Account. Any cost incurred in maintaining any such
hazard insurance policy shall not be added to the amount owing under the
Mortgage Loan for the purpose of calculating monthly distributions to
Certificateholders, notwithstanding that the terms of the Mortgage Loan so
permit. Such costs shall be recoverable by the Master Servicer out of related
late payments by the Mortgagor or out of Insurance Proceeds or Liquidation
Proceeds or any other amounts in the Certificate Account. The right of the
Master Servicer to reimbursement for such costs incurred will be prior to the
right of Certificateholders to receive any related Insurance Proceeds or
Liquidation Proceeds or any other amounts in the Certificate Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80%
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to 90%) of the full replacement value of the improvements on the property in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the Mortgage Loans may decline as the principal balances owing thereon
decrease, and since residential properties have historically appreciated in
value over time, in the event of partial loss, hazard insurance proceeds may be
insufficient to restore fully the damaged property.
Where the property securing a Mortgage Loan is located at the time of
origination in a federally designated flood area, the Master Servicer will cause
with respect to such Mortgage Loan flood insurance to the extent available and
in accordance with industry practices to be maintained. Such flood insurance
will be in an amount equal to the lesser of (i) the Outstanding Principal
Balance of the related Mortgage Loan and (ii) the minimum amount required under
the terms of coverage to compensate for any damage or loss on a replacement cost
basis, but not more than the maximum amount of such insurance available for the
related Mortgaged Property under either the regular or emergency programs of the
National Flood Insurance Program (assuming that the area in which such Mortgaged
Property is located is participating in such program). Unless applicable state
law requires a higher deductible, the deductible on such flood insurance may not
exceed $1,000 or 1% of the applicable amount of coverage, whichever is less.
The Master Servicer, on behalf of the Trustee and Certificateholders, will
present claims to the insurer under any applicable Primary Insurance Policy or
hazard insurance policy. As set forth above, all collections by the Master
Servicer under such policies that are not applied to the restoration or repair
of the related Mortgaged Property or released to the Mortgagor in accordance
with normal servicing procedures are to be deposited in a Protected Account.
Realization Upon Defaulted Mortgage Loans; Purchases of Defaulted Mortgage Loans
The Master Servicer will use its reasonable efforts to maximize the receipt of
principal and interest on Defaulted Mortgage Loans and foreclose upon or
otherwise comparably convert the ownership of properties securing Defaulted
Mortgage Loans as to which no satisfactory collection arrangements can be made.
The Master Servicer will service the property acquired by the Trust through
foreclosure or deed-in-lieu of foreclosure and use its reasonable efforts to
maximize the receipt of principal and interest on Defaulted Mortgage Loans;
provided, however, that the Master Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of any
property unless it determines in good faith (i) that such foreclosure or
restoration will increase the proceeds of liquidation of the Mortgage Loan to
the Certificateholders after reimbursement to itself for such expenses and (ii)
that such expenses will be recoverable to it through Liquidation Proceeds or
insurance proceeds (respecting which it shall have priority for purposes of
reimbursements from the Certificate Account).
Since Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no insurance payments will result in a recovery
to Certificateholders which exceeds the principal balance of the Defaulted
Mortgage Loan together with accrued interest thereon at its Net Rate.
Notwithstanding the foregoing, under the Agreement, the Master Servicer will
have the option (but not the obligation) to purchase any Mortgage Loan as to
which the Mortgagor has failed to make unexcused payment in full of three or
more scheduled payments of principal and interest (a "Defaulted Mortgage Loan").
Any such purchase will be for a price equal to the Repurchase Price of such
Mortgage Loan. The purchase price for any Defaulted Mortgage Loan will be
deposited in the Certificate Account on the Business Day prior to the
Distribution Date on which the proceeds of such purchase are to be distributed
to the Certificateholders.
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Certain Rights Related to Foreclosure
The Agreement may permit the Master Servicer, at its option, to grant certain
rights in connection with the foreclosure of Defaulted Mortgage Loans to holders
of the Class B-6 Certificates which are unaffiliated with ICI Funding Inc. Such
rights, if granted, would be granted after the date of initial issuance of the
Certificates and may or may not inure to the benefit of successive holders of
the Class B-6 Certificates. These rights would include, among other things, the
right to receive notice from the Master Servicer that foreclosure of a Defaulted
Mortgage Loan is imminent and the right to request that the Master Servicer, but
only with the consent of the Master Servicer, delay the commencement of
foreclosure proceedings for up to six months after the Mortgage Loan has become
delinquent. It would be a condition to the exercise of this latter right that a
reserve fund for the benefit of holders of the other applicable Classes of
Certificates and the Master Servicer be established. An amount equal to 125% of
the greater of the Scheduled Principal Balance of the Defaulted Mortgage Loan
and the current appraised value of the underlying Mortgaged Property, together
with interest at the applicable Mortgage Rate for the period that foreclosure is
delayed, would be deposited into such reserve fund. The principal purpose of
the reserve fund would be to protect holders of the other applicable Classes of
Certificates from any diminution in value of the underlying Mortgaged Property
attributable to the delay in foreclosure. Amounts on deposit in the reserve
fund may be invested in certain specified investments acceptable to the Rating
Agencies.
The exercise by holders of the Class B-6 Certificates of the right to delay
foreclosure would not alter the obligation of the Master Servicer to make
advances as described under "Monthly Advances" below. Monthly Advances made by
the Master Servicer after the date foreclosure is delayed would be recoverable
from amounts on deposit in the reserve fund.
Any exercise by the holders of the Class B-6 Certificates of any right to
delay commencement of foreclosure proceedings as described above, if granted,
could affect the amount recovered upon the liquidation of the related Mortgaged
Property and could also affect the extent of any losses recognized thereon if
the amounts available in the reserve fund are not sufficient to make up the
difference between the net liquidation proceeds and the unpaid principal balance
of the related Defaulted Mortgage Loan. There can be no assurance that this
situation would not arise under circumstances in which it could be in the
interest of more senior Classes of Certificates to proceed promptly to pursue
remedies against the Mortgagor and Mortgaged Property in order to expedite
recovery on a Defaulted Mortgaged Loan. Any right to request the delay of
commencement of foreclosure proceedings granted to the holders of the Class B-6
Certificates would terminate in certain specified circumstances, including when
the Current Principal Amount of such Class had reduced to zero.
Servicing Compensation and Payment of Expenses
The Master Servicer shall be entitled to receive the Master Servicing Fee (as
defined below) from full payments of accrued interest on each Mortgage Loan as
compensation for its activities under the Agreement. However, Interest
Shortfalls resulting from prepayments in full or in part in any calendar month
will be offset by the Master Servicer on the Distribution Date in the following
calendar month to the extent such Interest Shortfalls do not exceed the lesser
of (i) the Master Servicing Fee in connection with such Distribution Date or
(ii) 1/12 of 0.125% of the Scheduled Principal Balances of the Mortgage Loans
for such Distribution Date (the amount of the Master Servicing Fee used to
offset Interest Shortfalls is referred to herein as "Compensating Interest
Payments"). To the extent insufficient to cover all such Interest Shortfall,
Compensating Interest Payments will be allocated between Mortgage Loan Group I
and Mortgage Loan Group II pro rata based on the amount of such Interest
Shortfalls experienced by the Group I Mortgage Loans and the Group II Mortgage
Loans, respectively. The remaining amount of Interest Shortfalls after applying
Compensating Interest Payments is referred to herein as "Net Interest
Shortfalls."
In addition to the primary compensation described above, the Master Servicer
will retain all prepayment charges, if any, assumption fees, tax service fees,
fees for statement of account payoff and late payment charges, all to the extent
collected from Mortgagors. The Master Servicer will also be entitled to retain,
as additional servicing compensation, (a) amounts in respect of interest paid by
borrowers in connection with any principal prepayment in full received by the
Master Servicer from the first day through the 14th day of each month other
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than the month of the Cut-off Date, (b) any income earned on the Certificate
Account and certain other accounts and (c) any Excess Liquidation Proceeds
(i.e., the amount, if any, by which Liquidation Proceeds with respect to a
Liquidated Mortgage Loan exceeds the sum of (i) the Outstanding Principal
Balance of such Mortgage Loan and accrued but unpaid interest at the related
Mortgage Rate through the related Liquidation Date, plus (ii) related
liquidation expenses, to the extent that such amount is not required by law to
be paid to the related Mortgagor), but only to the extent that transfers or
withdrawals from the Certificate Account with respect thereto are permitted
under the Agreement.
The Master Servicer or any sub-servicer will pay all expenses incurred in
connection with its servicing responsibilities (subject to limited reimbursement
as described herein). On each Distribution Date, the Trustee will pay itself
the respective fees and reimbursable expenses to which it is entitled for the
month of such Distribution Date from amounts in the Certificate Account.
In the event a successor Trustee is appointed by the Certificateholders
pursuant to the Agreement, that portion, if any, of the successor Trustee's fees
which exceeds the Trustee's fees established at the time of issuance of the
Certificates will be borne by the Certificateholders.
The "Master Servicing Fee" in respect of each Mortgage Loan will be 0.25% per
annum of the Outstanding Principal Balance of such Mortgage Loan. The Master
Servicing Fee consists of (a) servicing compensation payable to the Master
Servicer in respect of its master servicing activities and (b) sub-servicing and
other related compensation payable to the Sub-Servicer.
Protected Account
The Master Servicer and each permitted sub-servicer will establish and
maintain an account (each, a "Protected Account") into which it will deposit
daily all collections of principal and interest on any Mortgage Loan, including
Principal Prepayments, Insurance Proceeds, Liquidation Proceeds, the Repurchase
Price for any Mortgage Loans repurchased, and advances made from the Master
Servicer's own funds (less servicing compensation as permitted above). All
Protected Accounts shall be held in a depository institution, the accounts of
which are insured by the FDIC to the maximum extent permitted by law, segregated
on the books of such institution and held in trust. The amount at any time
credited to a Protected Account shall be fully insured by the FDIC to the
maximum extent permitted by law or, to the extent that such balance exceeds the
limits of such insurance, such excess must be transferred to an account or
invested in permitted investments meeting the requirements of the Rating
Agencies or to the Certificate Account. Certain payments may be required to be
transferred into noncommingled accounts on an accelerated basis.
Prior to each Distribution Date, the Master Servicer shall withdraw or shall
cause to be withdrawn from the Protected Accounts and any other permitted
accounts and shall deposit or cause to be deposited in the Certificate Account
amounts representing the following collections and payments (other than with
respect to principal of or interest on the Mortgage Loans due on or before the
Cut-off Date):
(i) Scheduled payments on the related Mortgage Loans received or advanced by
the Master Servicer which were due on the related Due Date, net of servicing
fees due the Master Servicer;
(ii) Full principal prepayments and any Liquidation Proceeds received by the
Master Servicer with respect to such Mortgage Loans in the related Prepayment
Period, with interest to the date of prepayment or liquidation, net of servicing
fees due the Master Servicer; and
(iii) Partial prepayments of principal received by the Master Servicer for
such Mortgage Loans in the related Prepayment Period.
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Certificate Account
The Trustee shall establish and maintain in the name of the Trustee, for the
benefit of the Certificateholders, an account (the "Certificate Account") as a
non-interest bearing trust account. The Certificate Account shall have two
separate subaccounts, one each for all funds with respect to each Mortgage Loan
Group. The Trustee will deposit in the appropriate subaccount of the
Certificate Account, as received, the following amounts:
(i) Any amounts withdrawn from a Protected Account or other permitted account;
(ii) Any Monthly Advance and Compensating Interest Payments;
(iii) Any Insurance Proceeds or Liquidation Proceeds received by the Master
Servicer which were not deposited in a Protected Account or other permitted
account;
(iv) The Repurchase Price with respect to any Mortgage Loans repurchased and
all proceeds of any Mortgage Loans or property acquired in connection with the
optional termination of the Trust;
(v) Any amounts required to be deposited with respect to losses on Permitted
Investments; and
(vi) Any other amounts received by the Master Servicer or the Trustee and
required to be deposited in the Certificate Account pursuant to the Agreement.
All amounts deposited to the Certificate Account shall be held by the Trustee
in the name of the Trustee in trust for the benefit of the Certificateholders in
accordance with the terms and provisions of the Agreement, subject to the right
of the Master Servicer to require the Trustee to make withdrawals therefrom as
provided below. The amount at any time credited to the Certificate Account shall
be in general (i) fully insured by the FDIC to the maximum coverage provided
thereby or (ii) at the written direction of the Master Servicer invested, in the
name of the Trustee, in such Permitted Investments as the Master Servicer may
direct or deposited in demand deposits with such depository institutions as
designated by the Master Servicer, provided that time deposits of such
depository institutions would be a Permitted Investment.
The Trustee will, from time to time on demand of the Master Servicer, make or
cause to be made such withdrawals or transfers from the appropriate subaccount
of the Certificate Account as the Master Servicer has designated for such
transfer or withdrawal for the following purposes:
(i) to reimburse the Master Servicer or a Sub-Servicer for any Monthly Advance
of its own funds or any advance of such Sub-Servicer's own funds, the right of
the Master Servicer or a Sub-Servicer to reimbursement pursuant to this
subclause (i) being limited to amounts received on a particular Mortgage Loan
(including, for this purpose, the Repurchase Proceeds, Insurance Proceeds and
Liquidation Proceeds) which represent late payments or recoveries of the
principal of or interest on such Mortgage Loan respecting which such Monthly
Advance or advance was made;
(ii) to reimburse the Master Servicer or a Sub-Servicer from Insurance
Proceeds or Liquidation Proceeds relating to a particular Mortgage Loan for
amounts expended by the Master Servicer or a Sub-Servicer in good faith in
connection with the restoration of the related Mortgaged Property which was
damaged by an uninsured cause or in connection with the liquidation of such
Mortgage Loan;
(iii) to reimburse the Master Servicer or a Sub-Servicer to the extent
permitted by the Agreement from Insurance Proceeds relating to a particular
Mortgage Loan for expenses incurred with respect to such Mortgage Loan and to
reimburse the Master Servicer or a Sub-Servicer from Liquidation Proceeds from a
particular Mortgage Loan for liquidation expenses incurred with respect to such
Mortgage Loan;
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(iv) to pay the Master Servicer or a Sub-Servicer to the extent permitted by
the Agreement from Liquidation Proceeds or Insurance Proceeds received in
connection with the liquidation of a Mortgage Loan, the amount which the Master
Servicer or a Sub-Servicer would have been entitled to receive under subclause
(ix) below as servicing compensation on account of each defaulted scheduled
payment on such Mortgage Loan if paid in a timely manner by the related
Mortgagor;
(v) to pay the Master Servicer or a Sub-Servicer to the extent permitted by
the Agreement from the Repurchase Price for any Mortgage Loan, the amount which
the Master Servicer or a Sub-Servicer would have been entitled to receive under
subclause (ix) below as servicing compensation;
(vi) to reimburse the Master Servicer or a Sub-Servicer for certain advances
of funds made to protect a Mortgaged Property, the right to reimbursement
pursuant to this subclause being limited to amounts received on the related
Mortgage Loan (including, for this purpose, the Repurchase Proceeds, Insurance
Proceeds and Liquidation Proceeds) which represent late recoveries of the
payments for which such advances were made;
(vii) to pay the Master Servicer or a Sub-Servicer with respect to each
Mortgage Loan that has been repurchased, all amounts received thereon,
representing recoveries of principal that reduce the Outstanding Principal
Balance of the related Mortgage Loan below the Outstanding Principal Balance
used in calculating the Repurchase Price or representing interest included in
the calculation of the Repurchase Price or accrued after the end of the month
during which such repurchase occurs;
(viii) to reimburse the Master Servicer or a Sub-Servicer for any Monthly
Advance or advance, if a Realized Loss is to be allocated with respect to the
related Mortgage Loan on the related Distribution Date, if the advance has not
been reimbursed pursuant to clauses (i) and (vi);
(ix) to pay the Master Servicer and a Sub-Servicer servicing compensation as
set forth above;
(x) to reimburse the Master Servicer for expenses, costs and liabilities
incurred by and reimbursable to it pursuant to the Agreement, which, if not
specifically allocable to a Mortgage Loan Group, shall be allocated to each
subaccount, pro rata, based on the Schedule Principal Balances of the Group I
Mortgage Loans and the Group II Mortgage Loans;
(xi) to pay to the Master Servicer, as additional servicing compensation, any
Excess Liquidation Proceeds;
(xii) to clear and terminate the Certificate Account; and
(xiii) to remove amounts deposited in error.
On each Distribution Date, the Trustee shall make the following payments from
the funds in the Certificate Account:
(i) First, the Trustee's Fees shall be paid to the Trustee; and
(ii) Second, the amount distributable to the Certificateholders shall be paid
in accordance with the provisions set forth under "Description of the
Certificates--Distributions on the Certificates."
Certain Matters Regarding the Master Servicer
The Agreement will provide that the Master Servicer may not resign from its
obligations and duties thereunder, except upon determination that the
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Trustee or a successor has
assumed the obligations and duties of the Master Servicer to the extent required
under the Agreement. The Master Servicer,
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however, has the right, with the written consent of the Insurer (which consent
will not be unreasonably withheld), to assign, sell or transfer its rights and
delegate its duties and obligations under the Agreement; provided that the
rating of the Certificates in effect immediately prior to such assignment, sale,
transfer or delegation is not qualified, downgraded or withdrawn as a result of
such assignment, sale, transfer or delegation and the purchaser or transferee
accepting such assignment, sale, transfer or delegation (i) is qualified to
service mortgage loans for FNMA or FHLMC, (ii) is reasonably satisfactory to the
Trustee, (iii) has a net worth of not less than $10,000,000 and (iv) executes
and delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such purchaser or
transferee of the due and punctual performance and observance of each covenant
and condition to be performed or observed by the Master Servicer under the
Agreement from and after the date of such agreement.
The Agreement will further provide that neither the Master Servicer nor any of
its directors, officers, employees and agents shall be under any liability to
the Trustee, the Trust or the Certificateholders for taking any action or for
refraining from taking any action in good faith pursuant to the Agreement, or
for errors in judgment; provided, however, that neither the Master Servicer nor
any such person will be protected against any breach of warranties or
representations made in the Agreement or any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Master Servicer
and its directors, officers, employees and agents are entitled to
indemnification from the Certificate Account and will be held harmless thereby
against any loss, liability or expense incurred in connection with any legal
proceeding relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loans (except as otherwise
reimbursable under the Agreement) or incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In addition,
the Agreement will provide that the Master Servicer is under no obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties under the Agreement and which in its opinion may involve it in any
expense or liability. The Master Servicer may, however, in its discretion
undertake any such action which it may deem necessary or desirable in respect of
the Agreement and the rights and duties of the parties thereto and the interests
of the Certificateholders thereunder. In such event, the legal expenses and
costs of such action and any liability resulting therefrom will be expenses,
costs and liabilities of the Trust and the Master Servicer will be entitled to
be reimbursed therefor from the Certificate Account. Any such indemnification
or reimbursement to the Trustee which is not specifically related to a Mortgage
Loan Group shall be charged against the subaccounts of the Certificate Account
pro rata based upon the respective outstanding principal amounts of the Group I
Mortgage Loans and the Group II Mortgage Loans.
Any corporation into which the Master Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Master Servicer is a party, or any corporation succeeding to the
business of the Master Servicer will be the successor of the Master Servicer
under the Agreement, provided that any such successor to the Master Servicer
shall be qualified to service Mortgage Loans on behalf of FNMA or FHLMC.
Events of Default
"Events of Default" under the Agreement consist of (i) failure by the Master
Servicer to cause to be deposited in the Certificate Account amounts required to
be deposited by the Master Servicer pursuant to the Agreement, and such failure
continues unremedied for two Business Days, (ii) failure by the Master Servicer
to observe or perform in any material respect any other material covenants and
agreements set forth in the Certificates or the Agreement to be performed by it,
and such failure continues unremedied for 60 days after the date on which
written notice of such failure has been given to the Master Servicer by the
Trustee or to the Master Servicer and the Trustee by the holders of Certificates
aggregating ownership of not less than 25% of the Trust, (iii) the entry against
the Master Servicer of a decree or order by a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a
conservator, receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the winding
up or liquidation of its affairs, and the continuance of any such decree or
order unstayed and in effect for a period of 60 consecutive days, or the
commencement of an involuntary case against the Master Servicer under any
applicable
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insolvency or reorganization statute which case is not dismissed within 60 days,
(iv) consent by the Master Servicer to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings of or relating to the Master
Servicer or substantially all of its property, admission by the Master Servicer
in writing of its inability to pay its debts generally as they become due,
filing of a petition to take advantage of any applicable insolvency or
reorganization statute, any assignment for the benefit of its creditors, or
voluntary suspension of payment of its obligations or (v) assignment or
delegation by the Master Servicer of its duties or rights under the Agreement in
contravention of the provisions permitting such assignment or delegation under
the Agreement.
In each and every such case, so long as such Event of Default with respect to
the Master Servicer shall not have been remedied, the Trustee or the holders of
Certificates aggregating ownership of not less than 51% of the Trust may in each
case by notice in writing to the Master Servicer (and to the Trustee if given by
such Certificateholders), with a copy to the Rating Agencies, terminate all of
the rights and obligations (but not the liabilities) of the Master Servicer
under the Agreement and in and to the Mortgage Loans serviced by the Master
Servicer and the proceeds thereof. Upon the receipt by the Master Servicer of
such written notice, all authority and power of the Master Servicer under the
Agreement, whether with respect to the Certificates, the Mortgage Loans or under
any other related agreements (but only to the extent that such other agreements
relate to the Mortgage Loans) shall, subject to the provisions of the Agreement,
automatically and without further action pass to and be vested in the Trustee.
Upon the receipt by the Master Servicer of a notice of termination or an
opinion of counsel to the effect that the Master Servicer is legally unable to
act or to delegate its duties to a person which is legally able to act, the
Trustee shall automatically become the successor in all respects to the Master
Servicer in its capacity under the Agreement and the transactions set forth or
provided for therein and shall thereafter be subject to all the
responsibilities, duties, liabilities and limitations on liabilities relating
thereto placed on the Master Servicer by the terms and provisions hereof;
provided, however, that the Trustee (i) shall be under no obligation to
repurchase any Mortgage Loan; and (ii) shall have no obligation whatsoever with
respect to any liability incurred by the Master Servicer at or prior to the time
of receipt by such Master Servicer of such notice or of such opinion of counsel.
As compensation therefor, the Trustee shall be entitled to all funds relating to
the Mortgage Loans which the Master Servicer would have been entitled to retain
if the Master Servicer had continued to act as such, except for those amounts
due the Master Servicer as reimbursement for advances previously made.
Notwithstanding the above, the Trustee may, if it shall be unwilling so to act,
or shall, if it is legally unable so to act, appoint, or petition a court of
competent jurisdiction to appoint, any established housing and home finance
institution which is a FNMA or FHLMC-approved servicer having a net worth of not
less than $10,000,000, as the successor to the Master Servicer under the
Agreement in the assumption of all or any part of the responsibilities, duties
or liabilities of the Master Servicer under the Agreement. Pending appointment
of a successor to the Master Servicer under the Agreement, the Trustee shall act
in such capacity as provided under the Agreement. In connection with such
appointment and assumption, the Trustee may make such arrangements for the
compensation of such successor out of payments on Mortgage Loans as it and such
successor shall agree; provided, however, that no such compensation shall be in
excess of that permitted the Trustee as provided above, and that such successor
shall undertake and assume the obligations of the Trustee to pay compensation to
any third person acting as an agent or independent contractor in the performance
of master servicing responsibilities under the Agreement.
Monthly Advances
If the scheduled payment on a Mortgage Loan which was due on the Due Date in
the month of a Distribution Date and is delinquent other than as a result of
application of the Relief Act exceeds the amount deposited in the appropriate
subaccount of the Certificate Account which will be used for a Certificate
Account Advance (as defined below) with respect to such Mortgage Loan, the
Master Servicer will deposit in the appropriate subaccount of the Certificate
Account not later than the fourth Business Day immediately preceding the
Distribution Date an amount equal to such deficiency net of the related Master
Servicing Fee except to the extent the Master Servicer determines any such
advance to be nonrecoverable from Liquidation Proceeds, Insurance Proceeds or
from future payments on the Mortgage Loan for which such advance was made.
Subject to the foregoing, such advances will be made through liquidation of the
related Mortgaged Property. Any amount
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used as a Certificate Account Advance shall be replaced by the Master Servicer
by deposit in the appropriate subaccount of the Certificate Account on or before
any future date to the extent that funds in the appropriate subaccount of the
Certificate Account on such date are less than the amount required to be
transferred to the appropriate subaccount of the Certificate Account. If
applicable, on the fifth Business Day preceding each Distribution Date, the
Master Servicer shall present an Officer's Certificate to the Trustee (i)
stating that the Master Servicer elects not to make a Monthly Advance in a
stated amount and (ii) detailing the reason it deems the advance to be
nonrecoverable.
As of any Determination Date, a "Certificate Account Advance" is the amount on
deposit in a Protected Account or another permitted account which is not
required to be transferred to the Certificate Account for distribution during
the calendar month in which such Determination Date occurs but which is used to
make a distribution to Certificateholders during such calendar month on account
of scheduled payments on the Mortgage Loans due on the Due Date for such month
not being paid on or before the Determination Date except insofar as such unpaid
amounts are the result of application of the Relief Act.
Reports to Certificateholders
On each Distribution Date, a written report will be provided to each holder of
Certificates setting forth certain information with respect to the composition
of the payment being made, the Current Principal Amount or Notional Amount of an
individual Certificate following the payment and certain other information
relating to the Certificates and the Mortgage Loans.
Termination
The obligations of the Master Servicer and the Trustee created by the
Agreement will terminate upon (i) the later of the making of the final payment
or other liquidation, or any advance with respect thereto, of the last Mortgage
Loan subject thereto or the disposition of all property acquired upon
foreclosure or acceptance of a deed in lieu of foreclosure of any such Mortgage
Loans and (ii) the payment to Certificateholders of all amounts required to be
paid to them pursuant to such Agreement.
On any Distribution Date on which the aggregate unpaid principal balance of
the Mortgage Loans is less than 10% of the aggregate Scheduled Principal Balance
as of the Cut-off Date, the Master Servicer or its designee may repurchase from
the Trust all Mortgage Loans remaining outstanding at a purchase price equal to
(a) the unpaid principal balance of such Mortgage Loans (other than Mortgage
Loans related to REO Property), net of the principal portion of any unreimbursed
Monthly Advances made by the purchaser, plus accrued but unpaid interest thereon
at the applicable Mortgage Rate to the next Due Date, plus (b) the appraised
value of any REO Property (but not more than the unpaid principal balance of the
related Mortgage Loan, together with accrued but unpaid interest on that balance
at the applicable Mortgage Rate to the next Due Date), less the good faith
estimate of the Master Servicer of liquidation expenses to be incurred in
connection with its disposal thereof. The Trust may also be terminated and the
Certificates retired on any Distribution Date upon the Master Servicer's
determination, based upon an opinion of counsel, that the REMIC status of REMIC
I or REMIC II has been lost or that a substantial risk exists that such status
will be lost for the then current taxable year. Upon termination, the holders of
Certificates (other than the Class A-I-8 and Class X Certificates) will receive
the Current Principal Amount of their Certificates, if any, and accrued but
unpaid interest and the holders of the Class A-I-8 and Class X Certificates will
receive accrued but unpaid interest on their Certificates.
The Trustee
The Trustee may resign at any time, in which event the Master Servicer will be
obligated to appoint a successor Trustee. The Trustee also may be removed at
any time by the Master Servicer, if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes incapable of
acting, bankrupt, insolvent or if a receiver or public officer takes charge of
the Trustee or its property. The Trustee may also be removed at any time by the
holders of Certificates evidencing ownership of not less than 51% of the Trust.
In the event that the Certificateholders remove the Trustee, the compensation of
any successor Trustee shall be paid by
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the Certificateholders to the extent that such compensation exceeds the amount
agreed to by the Master Servicer and the Trustee. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Mortgage Loans, the Certificate Account
and certain assets owned by the Trust as a REMIC ("REMIC II") for federal income
tax purposes. REMIC II will issue "regular interests" and one "residual
interest." An election will be made to treat the "regular interests" in REMIC
II and certain other assets owned by the Trust as a REMIC ("REMIC I"). The
Certificates (other than the Class R-1, Class R-2 and Class X Certificates), as
well as the Separate Components of the Class X Certificates, will be designated
as regular interests in REMIC I. The Certificates (other than the Class R-1 and
Class R-2 Certificates) and, where the context so requires, the Separate
Components of the Class X Certificates (in lieu of the Class X Certificates) are
herein referred to as "Regular Certificates" or "REMIC Regular Certificates".
The Class R-2 Certificates will be designated as the residual interest in REMIC
II and the Class R-1 Certificates will be designated as the residual interest in
REMIC I (collectively, the "Residual Certificates" or the "REMIC Residual
Certificates"). All Certificateholders are advised to see "Certain Federal
Income Tax Consequences" in the Prospectus for a discussion of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the REMIC Regular Certificates and the REMIC Residual Certificates.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. The
Class A-I-8 Certificates, the Class PO Certificates and each of the Separate
Components comprising the Class X Certificates will be treated as issued with
original issue discount. Some or all of the other Classes of Regular
Certificates may also be subject to the original issue discount provisions. See
"Certain Federal Income Tax Consequences--REMIC Regular Certificates--Current
Income on REMIC Regular Certificates--Original Issue Discount" in the
Prospectus. All purchasers of REMIC Regular Certificates are urged to consult
their tax advisors for advice regarding the effect, if any, of the OID
Regulations on the purchase of the Regular Certificates. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount with respect to the Certificates is 100% of the Prepayment
Assumption. The Prepayment Assumption represents a rate of payment of
unscheduled principal on a pool of mortgage loans, expressed as an annualized
percentage of the outstanding principal balance of such mortgage loans at the
beginning of each period. However, no representation is made as to the rate at
which prepayments actually will occur. In addition, other Classes of Regular
Certificates may be treated as having been issued at a premium. See "Certain
Federal Income Tax Consequences--REMIC Regular Certificates--Premium" in the
Prospectus.
The Residual Certificates generally will not be treated as evidences of
indebtedness for federal income tax purposes. Instead, the Residual
Certificates will be considered as residual interests in a REMIC, representing
rights to the taxable income or net loss of REMIC I (in the case of the Class R-
1 Certificates) or REMIC II (in the case of the Class R-2 Certificates).
Holders of the Residual Certificates will be required to report and will be
taxed on their pro rata share of such income or loss, and such reporting
requirements will continue until there are no Certificates of any Class
outstanding, even though holders of Residual Certificates previously may have
received full payment of any stated interest and principal. The taxable income
of holders of the Residual Certificates attributable to the Residual
Certificates may exceed any principal and interest payments received by such
Certificateholders during the corresponding period, which would result in a
negligible (or even negative) after-tax return, in certain circumstances.
The Offered Certificates (excluding the Class X Certificates and including the
Residual Certificates) as well as each of the Separate Components comprising the
Class X Certificates will be treated as "regular" or "residual interests in a
REMIC" for domestic building and loan associations, and "real estate assets" for
real estate investment trusts ("REITs"), subject to the limitations described in
"Certain Federal Income Tax Consequences--REMIC Certificates--Status of REMIC
Certificates as Real Property Loans" in the Prospectus. Similarly, interest
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on such Certificates and the Separate Components of the Class X Certificates
will be considered "interest on obligations secured by mortgages on real
property" for REITs, subject to the limitations described in "Certain Federal
Income Tax Consequences--REMIC Certificates--Status of REMIC Certificates as
Real Property Loans" in the Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA should
consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the Certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor, or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively,
"Plan(s)"), should consult with their legal counsel to determine whether an
investment in the Certificates will cause the assets of the Trust ("Trust
Assets") to be considered plan assets pursuant to the plan asset regulations set
forth at 29 C.F.R. ' 10.3-101 (the "Plan Asset Regulations"), thereby subjecting
the Plan to the prohibited transaction rules with respect to the Trust Assets
and the Trustee or the Master Servicer to the fiduciary investments standards of
ERISA, or cause the excise tax provisions of Section 4975 of the Code to apply
to the Trust Assets, unless an exemption granted by the Department of Labor
applies to the purchase, sale, transfer or holding of the Certificates. In
particular, investors that are insurance companies should consult with their
legal counsel with respect to the United States Supreme Court case, John Hancock
Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 114 S.Ct. 517
(1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be plan assets under
certain circumstances. Investors should analyze whether that decision or recent
federal legislation enacted affecting insurance company general accounts (see
Section 1460 of the Small Job Protection Act of 1996) may have an impact with
respect to purchases of Certificates.
Prohibited Transaction Exemption 90-30 (the "Exemption") will generally be met
with respect to the Senior Certificates (other than the Class PO Certificates),
except for those conditions which are dependent on facts unknown to BSMSI or
which it cannot control, such as those relating to the circumstances of the Plan
purchaser or the Plan fiduciary making the decision to purchase such Class of
Senior Certificates. However, before purchasing a Senior Certificate (other
than a Class PO Certificate), a fiduciary of a Plan should make its own
determination as to the availability of exemptive relief provided by the
Exemption or the availability of any other prohibited transaction exemptions,
and whether the conditions of any such exemption will be applicable to such
Senior Certificates. See "ERISA Considerations" in the Prospectus.
The Exemption does not apply to the Class B Certificates because the rights
and interests evidenced by such Class B Certificates are subordinated to the
rights and interests evidenced by other Classes of Certificates issued by the
Trust.
The Exemption does not apply to the Class PO Certificates because neither the
Underwriter nor any of its affiliates is either underwriting or acting as a
selling or placement agent with respect to the Class PO Certificates. However,
if the Class PO Certificates were to be made available for purchase in the
secondary market through an underwriting or sale or placement by an entity
(including the Underwriter) which has been granted an underwriters' prohibited
transaction exemption similar to the Exemption, such Class PO Certificates, as
applicable would be eligible for purchase by Plans, subject to the same
considerations set forth herein with respect to the other Classes of Senior
Certificates.
The Class PO and Class B Certificates may be acquired for or on behalf of a
purchaser which is acquiring such Certificates directly or indirectly for or on
behalf of a Plan, provided that the proposed transferee provides a Benefit Plan
Opinion to the Trustee. A "Benefit Plan Opinion" is an opinion of counsel
satisfactory to the Trustee (and upon which the Trustee and the Master Servicer
are authorized to rely) to the effect that neither the proposed transfer and/or
holding of a Certificate nor the servicing, management and operation of the
Trust (i) will result in a prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code which will not be covered under
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an individual or class prohibited transaction exemption including but not
limited to Department of Labor Prohibited Transaction Exemption ("PTE") 84-14
(Class Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers); PTE 91-38 (Class Exemption for Certain
Transactions Involving Bank Collective Investment Funds); PTE 90-1 (Class
Exemption for Certain Transactions Involving Insurance Company Pooled Separate
Accounts), PTE 95-60 (Class Exemption for Certain Transactions Involving
Insurance Company General Accounts), and PTCE 96-23 (Class Exemption for Plan
Asset Transactions Determined by In-House Asset Managers) or (ii) will give rise
to any additional fiduciary duties under ERISA on the part of the Master
Servicer or the Trustee. A Benefit Plan Opinion shall not be an expense of the
Trustee or the Master Servicer.
In the event that the Class PO Certificates are made available for purchase in
the secondary market through an underwriting or sale or placement by an entity
(including the Underwriter) which has been granted an underwriter's prohibited
transaction exemption similar to the Exemption, no Benefit Plan Opinion shall be
required for the Class PO Certificates, as applicable, to be acquired by, or
transferred to, an entity which is acquiring such Certificates directly or
indirectly for or on behalf of, a Benefit Plan Investor.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the Senior Certificates. Assets of a Plan should not be invested in the Senior
Certificates unless it is clear that the Exemption or any other prohibited
transaction exemption will apply and exempt all potential prohibited
transactions.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such governmental plan may be subject to
Federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for and the availability of any exemptive relief under any Similar Law.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization, and, as such, will be legal investments for certain
entities to the extent provided in SMMEA, subject to state laws overriding
SMMEA. Certain states have enacted legislation overriding the legal investment
provisions of SMMEA. The remaining Classes of Certificates will not constitute
"mortgage related securities" under SMMEA (the "Non-SMMEA Certificates"). The
appropriate characterization of the Non-SMMEA Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Non-SMMEA Certificates, may be subject to significant
interpretive uncertainties.
All investors whose investment activities are subject to legal investment laws
and regulations or to review by certain regulatory authorities may be subject to
restrictions on investment in the Certificates. Any such institution should
consult its own legal advisors in determining whether and to what extent there
may be restrictions on its ability to invest in the Certificates. See "Legal
Investment" In the Prospectus.
RESTRICTIONS ON PURCHASE AND TRANSFER OF THE RESIDUAL CERTIFICATES
The Residual Certificates are not offered for sale to any investor that is a
"disqualified organization" as described in "Certain Federal Income Tax
Consequences--Transfers of REMIC Residual Certificates--Tax on Disposition of
REMIC Residual Certificates" and "--Restrictions on Transfer; Holding by Pass-
Through Entities" in the Prospectus.
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Residual Certificates (or interests therein) may not be transferred without
the prior express written consent of Bankers Trust Company of California, N.A.,
acting as "Tax Matters Person" as defined in the Code. The Tax Matters Person
will not give its consent to any proposed transfer to a disqualified
organization. As a prerequisite to such consent to any other transfer, the
proposed transferee must provide the Tax Matters Person and the Trustee with an
affidavit that the proposed transferee is not a disqualified organization (and,
unless the Tax Matters Person consents to the transfer to a person who is not a
U.S. Person (as defined below), an affidavit that it is a U.S. Person).
Notwithstanding the fulfillment of the prerequisites described above, the Tax
Matters Person may withhold its consent to a transfer, but only to the extent
necessary to avoid a risk of REMIC disqualification or REMIC-level tax. In the
event that legislation is enacted which would subject the Trust to tax (or
disqualify REMIC I or REMIC II as a REMIC) on the transfer of an interest in a
Residual Certificate to any other person or persons, the Tax Matters Person may,
without action on the part of Holders, amend the Agreement to restrict or
prohibit prospectively such transfer. A transfer in violation of the
restrictions set forth herein may subject a Residual Certificateholder to
taxation. See "Certain Federal Income Tax Consequences--REMIC Residual
Certificates--Transfers of REMIC Residual Certificates--Tax on Disposition of
REMIC Residual Certificates" and "--Restrictions on Transfer; Holding by Pass-
Through Entities" in the Prospectus. Moreover, certain transfers of Residual
Certificates that are effective to transfer legal ownership may nevertheless be
ineffective to transfer ownership for federal income tax purposes, if at the
time of the transfer the Residual Certificate represents a "non-economic
residual interest" as defined in the REMIC Regulations and if avoiding or
impeding the assessment or collection of tax is a significant purpose of the
transfer. See "Certain Federal Income Tax Consequences--REMIC Residual
Certificates--Transfers of REMIC Residual Certificates" and "--Restrictions on
Transfer; Holding by Pass-Through Entities" in the Prospectus. Further, unless
the Tax Matters Person consents in writing (which consent may be withheld in the
Tax Matters Person's sole discretion), the Residual Certificates (including a
beneficial interest therein) may not be purchased by or transferred to any
person who is not a "United States person," as such term is defined in Section
7701(a)(30) of the Code (a "U.S. Person").
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Offered Certificates (other than the Class PO Certificates), are being
purchased from BSMSI by the Underwriter upon issuance. The Underwriter is an
affiliate of BSMSI. Distribution of such Certificates will be made from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to BSMSI are expected to be approximately 103.0%
of the aggregate principal balance of the Offered Certificates, as of the Cut-
off Date, plus accrued interest thereon, but before deducting expenses payable
by BSMSI in connection with the Offered Certificates. ln connection with the
purchase and sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from BSMSI in the form of an underwriting discount.
BSMSI will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
BSMSI and the Underwriter by Stroock & Stroock & Lavan, New York, New York.
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RATINGS
It is a condition to the issuance of each Class of Offered Certificates that
it receives the ratings set forth below from S&P and Fitch.
Rating
------------------------------------------------
Class S&P Fitch
- ----- --- -----
Class A-I-1 AAA AAA
Class A-I-2 AAA AAA
Class A-I-3 AAA AAA
Class A-I-4 AAA AAA
Class A-I-5 AAA AAA
Class A-I-6 AAA AAA
Class A-I-7 AAA AAA
Class A-I-8 AAAr AAA
Class A-I-9 AAA AAA
Class A-I-10 AAA AAA
Class A-I-11 AAA AAA
Class A-II AAA AAA
Class PO AAAr AAA
Class X AAAr AAA
Class B-1 AA AA
Class B-2 A A
Class B-3 -- BBB
Class R-1 AAA AAA
Class R-2 AAA AAA
S&P's ratings on mortgage pass-through certificates address the likelihood of
the receipt by Certificateholders of payments required under the Agreement.
S&P's ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Certificates, and the extent to
which the payment stream in the mortgage pool is adequate to make payments
required under the Certificates. S&P's rating on the Offered Certificates does
not, however, constitute a statement regarding frequency of prepayments on the
mortgages. The "r" symbol is appended to the rating by S&P of those
Certificates that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. The absence of an "r"
symbol in the ratings of the other Offered Certificates should not be taken as
an indication that such Certificates will exhibit no volatility or variability
in total return.
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements pursuant to which such
certificates are issued. Fitch's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make payments
required by such certificates. Fitch's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as a
result of principal prepayments (i) Certificateholders might suffer a lower than
anticipated yield and (ii) if there is a rapid rate of principal payments
(including principal prepayments) on the Mortgage Loans, investors in the Class
A-I-8 or Class X Certificates could fail to fully recover their initial
investments. The ratings on the Class R-1 and Class R-2 Certificates address
only the return of their respective principal balances and interest thereon.
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The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the Rating Agencies.
BSMSI has not requested a rating of the Offered Certificates by any rating
agency other than the Rating Agencies. However, there can be no assurance as to
whether any other rating agency will rate the Offered Certificates or, in such
event, what rating would be assigned to the Offered Certificates by such other
rating agency. The ratings assigned by such other rating agency to the Offered
Certificates may be lower than the ratings assigned by the Rating Agencies.
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PRINCIPAL DEFINITIONS
Page
----
Accrued Certificate Interest....................... S-13
Adjustment Amount.................................. S-54
Aggregate Expense Rate............................. S-8
Agreement.......................................... S-5
Allocable Share.................................... S-50
Assumed Final Distribution Date.................... S-55
Available Funds.................................... S-11
Bankruptcy Coverage Termination Date............... S-53
Bankruptcy Loss.................................... S-52
Bankruptcy Loss Amount............................. S-53
Book-Entry Certificates............................ S-6
BSMSI.............................................. S-2
Business Day....................................... S-37
Buydown Loans...................................... S-27
Cede............................................... S-37
Certificate Account................................ S-75
Certificate Account Advance........................ S-79
Certificate Owner.................................. S-37
Certificate Register............................... S-39
Certificateholder.................................. S-38
Certificates....................................... S-1
Class A Certificates............................... S-2
Class A-I Certificates............................. S-6
Class A-II Certificates............................ S-4
Class A-I Senior Percentage........................ S-48
Class A-II Senior Percentage....................... S-48
Class A-I-8 Notional Amount........................ S-1
Class A-I-11 Optimal Principal Amount.............. S-41
Class A-I-11 Pro Rata Optimal Principal Amount..... S-41
Class B Certificates............................... S-6
Class B Group I Principal Amount................... S-43
Class B Group II Principal Amount.................. S-44
Class PO Cash Shortfall............................ S-41
Class PO Deferred Amount........................... S-14
Class PO Deferred Payment Writedown Amount......... S-44
Class PO Principal Distribution Amount............. S-49
Class Prepayment Distribution Trigger.............. S-50
Class X Component I Accrued Certificate Interest... S-43
Class X Component II Accrued Certificate Interest.. S-44
Class X Notional Amount............................ S-1
Closing Date....................................... S-7
CLTV............................................... S-28
Code............................................... S-22
Compensating Interest Payments..................... S-12
Component I........................................ S-11
Component II....................................... S-11
CPR................................................ S-56
Cross-Over Date.................................... S-12
Current Principal Amount........................... S-12
Cut-off Date....................................... S-7
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Cut-off Date Scheduled Principal Balance........... S-7
Debt Service Reduction............................. S-52
Defaulted Mortgage Loan............................ S-72
Deficient Valuation................................ S-52
Definitive Certificates............................ S-38
Depositor.......................................... S-6
Determination Date................................. S-51
Distribution Date.................................. S-2
DTC................................................ S-37
Due Date........................................... S-8
Due Period......................................... S-9
ERISA.............................................. S-22
Events of Default.................................. S-77
Excess Bankruptcy Losses........................... S-16
Excess Fraud Losses................................ S-16
Excess Losses...................................... S-16
Excess Special Hazard Losses....................... S-16
Exemptions......................................... S-22
FHA................................................ S-26
Fitch.............................................. S-23
Floating Rate Certificates......................... S-6
Fraud Coverage Termination Date.................... S-53
Fraud Loss......................................... S-52
Fraud Loss Amount.................................. S-53
Group I Available Funds............................ S-39
Group II Available Funds........................... S-39
Group I Discount Mortgage Loan..................... S-46
Group I Mortgage Loans............................. S-2
Group II Mortgage Loans............................ S-2
Group I Senior Optimal Principal Amount............ S-47
Group II Senior Optimal Principal Amount........... S-47
ICII............................................... S-27
ICI Funding........................................ S-26
Indirect Participants.............................. S-38
Insurance Proceeds................................. S-51
Interest Accrual Period............................ S-10
Interest Shortfall................................. S-45
Inverse Floating Rate Certificates................. S-6
LIBOR.............................................. S-1
Liquidated Mortgage Loan........................... S-51
Liquidation Proceeds............................... S-51
Loss Allocation Limitation......................... S-53
Master Servicer.................................... S-6
Master Servicing Fee............................... S-74
Material Defect.................................... S-68
Monthly Advance.................................... S-16
Monthly Payment.................................... S-51
Mortgage File...................................... S-68
Mortgage Loan Group................................ S-2
Mortgage Loan Group I.............................. S-2
Mortgage Loan Group II............................. S-2
Mortgage Loans..................................... S-2
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Mortgage Rate...................................... S-8
Mortgaged Properties............................... S-7
Net Interest Shortfalls............................ S-45
Net Liquidation Proceeds........................... S-51
Net Rate........................................... S-8
Non-Discount Mortgage Loan......................... S-46
Non-SMMEA Certificates............................. S-24
Non-PO Percentage.................................. S-46
Offered Certificates............................... S-1
Original Subordinate Principal Balance............. S-49
Other Certificates................................. S-5
Outstanding Principal Balance...................... S-68
Participants....................................... S-38
Pass-Through Rate.................................. S-1
Permitted Investments.............................. S-70
Physical Certificates.............................. S-6
Plan(s)............................................ S-22
Plan Asset Regulations............................. S-81
PO Percentage...................................... S-46
Prepayment Assumption.............................. S-56
Prepayment Period.................................. S-9
Primary Insurance Policy........................... S-26
Principal Prepayment............................... S-51
Protected Account.................................. S-37
PTE 90-24.......................................... S-82
PTE 90-30.......................................... S-82
Rating Agencies.................................... S-23
Realized Loss...................................... S-51
Record Date........................................ S-9
Regular Certificates............................... S-6
REITs.............................................. S-80
Relief Act......................................... S-45
REMIC.............................................. S-3
REMIC I............................................ S-21
REMIC II........................................... S-21
REMIC Regular Certificates......................... S-22
REMIC Residual Certificates........................ S-22
REO Property....................................... S-51
Repurchase Price................................... S-68
Repurchase Proceeds................................ S-51
Residual Certificates.............................. S-6
Rules.............................................. S-38
Scheduled Principal Balance........................ S-9
Senior Certificates................................ S-6
Senior Percentage.................................. S-48
Senior Prepayment Percentage....................... S-48
Senior Prepayment Percentage Stepdown Limitation... S-48
Separate Components................................ S-42
Servicing Account.................................. S-70
SMMEA.............................................. S-24
S&P................................................ S-23
Special Hazard Loss................................ S-52
S-88
<PAGE>
Special Hazard Loss Amount......................... S-54
Special Hazard Termination Date.................... S-53
Subordinate Certificates........................... S-6
Subordinate Certificate Writedown Amount........... S-44
Subordinate Optimal Principal Amount............... S-51
Subordinate Percentage............................. S-49
Subordinate Prepayment Percentage.................. S-49
Sub-Servicer....................................... S-28
Tax Matters Person................................. S-23
Trust.............................................. S-2
Trust Assets....................................... S-22
Trustee............................................ S-7
Underwriter........................................ S-1
U.S. Person........................................ S-83
VA................................................. S-26
Wendover........................................... S-7
S-89
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The tables below set forth estimates of certain expected characteristics (as
of the Cut-off Date) of the Group I Mortgage Loans and Group II Mortgage
Loans. In each of the following tables, the percentages are based on the Cut-
off Date Scheduled Principal Balances and have been rounded and, as a result,
may not total 100.00%. The sum in any column may not equal the total indicated
due to rounding.
The description herein of the Mortgage Loans is based upon estimates of the
composition of the Mortgage Loans as of the Cut-off Date, as adjusted for all
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Certificates, Mortgage Loans may be removed as a result of (i)
Principal Prepayments thereof in full prior to December 13, 1996, (ii)
requirements of S&P or Fitch or (iii) delinquencies or otherwise. In any such
event, other mortgage loans may be included in the Trust. BSMSI believes that
the estimated information set forth herein with respect to the Mortgage Loans
and the Mortgage Loan Groups as presently constituted is representative of the
characteristics of the Mortgage Loans and the Mortgage Loan Groups as they
will be constituted at the time the Certificates are issued, although certain
characteristics of the Mortgage Loans and the Mortgage Loan Groups may vary.
YEAR OF FIRST PAYMENT OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
YEAR OF FIRST PAYMENT LOANS AS OF CUT-OFF DATE LOAN GROUP
- --------------------- --------- ------------------- ----------
<S> <C> <C> <C>
1995................................... 9 $ 1,260,213 0.73%
1996................................... 960 150,841,707 87.43
1997................................... 121 20,434,526 11.84
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average seasoning of the Group I
Mortgage Loans is expected to be approximately 2 months.
TYPES OF MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PROPERTY TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
Single-Family.......................... 778 $128,540,886 74.50%
Two- to Four-Family.................... 68 9,655,580 5.60
Planned Unit Development............... 141 23,710,487 13.74
Condominium............................ 103 10,629,492 6.16
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE LOAN GROUP
- ---------------- --------- ------------------- ----------
<S> <C> <C> <C>
Primary Residence...................... 973 $161,750,039 93.75%
Second Home............................ 59 6,590,005 3.82
Investor Property...................... 58 4,196,401 2.43
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) Based on representations of the Mortgagor at the time of Group I Mortgage
Loan Origination.
A-1
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTY SECURING GROUP I MORTGAGE
LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
STATE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ----- --------- ------------------- ----------
<S> <C> <C> <C>
Alabama................................ 1 $ 73,192 0.04%
Arizona................................ 11 1,429,505 0.83
California............................. 392 78,716,386 45.62
Colorado............................... 10 1,504,154 0.87
Connecticut............................ 4 363,795 0.21
Delaware............................... 2 235,455 0.14
District of Columbia................... 1 569,422 0.33
Florida................................ 240 28,173,239 16.33
Georgia................................ 20 3,695,524 2.14
Hawaii................................. 1 291,498 0.17
Idaho.................................. 2 289,014 0.17
Illinois............................... 7 689,645 0.40
Indiana................................ 1 55,657 0.03
Louisiana.............................. 2 399,967 0.23
Maine.................................. 2 286,256 0.17
Maryland............................... 10 1,563,538 0.91
Massachusetts.......................... 26 3,878,505 2.25
Michigan............................... 2 388,168 0.23
Minnesota.............................. 5 705,627 0.41
Missouri............................... 1 262,212 0.15
Montana................................ 3 304,845 0.18
Nevada................................. 16 2,490,604 1.44
New Hampshire.......................... 9 1,284,068 0.74
New Jersey............................. 128 18,924,454 10.97
New Mexico............................. 7 754,207 0.44
New York............................... 69 9,774,811 5.67
North Carolina......................... 11 1,215,257 0.70
Ohio................................... 2 269,314 0.16
Oregon................................. 4 345,485 0.20
Pennsylvania........................... 15 1,469,753 0.85
Rhode Island........................... 3 1,082,013 0.63
South Carolina......................... 4 272,534 0.16
Texas.................................. 22 2,644,421 1.53
Utah................................... 11 1,336,230 0.77
Virginia............................... 14 2,036,754 1.18
Washington............................. 31 4,663,836 2.70
Wisconsin.............................. 1 97,101 0.06
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, no more than approximately 0.91% of the aggregate
Outstanding Principal Balance of the Group I Mortgage Loans is expected to
be secured by properties located in any one zip code.
A-2
<PAGE>
LOAN PURPOSE OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOAN GROUP
- ------------ --------- ------------------- ----------
<S> <C> <C> <C>
Purchase............................... 657 $105,192,420 60.97%
Rate and Term Refinance................ 146 26,676,322 15.46
Cash-Out Refinance..................... 287 40,667,704 23.57
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
DISTRIBUTION OF ORIGINAL GROUP I MORTGAGE LOAN AMOUNTS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL MORTGAGE LOAN AMOUNT LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
$ 50,000 or less....................... 56 $ 2,356,794 1.37%
$ 50,001 - $100,000.................... 327 25,044,687 14.52
$100,001 - $150,000.................... 272 33,639,387 19.50
$150,001 - $200,000.................... 147 25,763,540 14.93
$200,001 - $250,000.................... 117 25,973,735 15.05
$250,001 - $300,000.................... 73 19,876,900 11.52
$300,001 - $350,000.................... 39 12,584,407 7.29
$350,001 - $400,000.................... 17 6,219,669 3.61
$400,001 - $450,000.................... 9 3,840,951 2.23
$450,001 - $500,000.................... 20 9,583,732 5.56
$500,001 - $550,000.................... 5 2,639,990 1.53
$550,001 - $600,000.................... 3 1,747,952 1.01
$600,001 - $650,000.................... 4 2,530,529 1.47
$700,001 - $750,000.................... 1 734,173 0.43
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the average Outstanding Principal Balance of the
Group I Mortgage Loan is expected to be approximately $158,290.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
50.00% or less......................... 98 $ 9,355,465 5.42%
50.01% - 55.00%........................ 21 2,416,223 1.40
55.01% - 60.00%........................ 45 5,200,240 3.01
60.01% - 65.00%........................ 48 7,633,279 4.42
65.01% - 70.00%........................ 167 24,903,688 14.43
70.01% - 75.00%........................ 226 38,178,413 22.13
75.01% - 80.00%........................ 377 64,305,824 37.27
80.01% - 85.00%........................ 10 1,785,387 1.04
85.01% - 90.00%........................ 81 15,437,295 8.95
90.01% - 95.00%........................ 17 3,320,633 1.93
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Group I Mortgage Loans is expected to be approximately
74.41%.
A-3
<PAGE>
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MORTGAGE RATE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
8.250%................................ 10 $ 2,097,804 1.22%
8.375%................................ 31 5,957,604 3.45
8.500%................................ 45 10,167,187 5.89
8.625%................................ 57 10,896,274 6.32
8.750%................................ 96 16,630,318 9.64
8.875%................................ 126 19,442,536 11.27
9.000%................................ 124 19,725,653 11.43
9.125%................................ 88 13,796,931 8.00
9.250%................................ 133 21,483,989 12.45
9.375%................................ 129 18,675,133 10.82
9.500%................................ 113 15,813,090 9.17
9.625%................................ 83 10,332,710 5.99
9.750%................................ 55 7,517,216 4.36
----- ------------ ------
Total................................ 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Mortgage Loans is expected to be approximately 9.076% per annum.
ORIGINAL TERM OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL TERM LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
180 or less............................ 106 $ 10,448,427 6.06%
181-360................................ 984 162,088,018 93.94
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average calculated remaining term of
the Group I Mortgage Loans is expected to be approximately 346 months.
DOCUMENTATION TYPE OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------------ --------- ------------------- ----------
<S> <C> <C> <C>
Full................................... 212 $ 39,309,215 22.78%
Alternative............................ 19 3,358,282 1.95
Reduced/Stated Income.................. 648 97,354,532 56.43
No Income/No Asset..................... 211 32,514,416 18.85
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
A-4
<PAGE>
UNDERWRITING PROGRAMS OF THE GROUP I MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
UNDERWRITING PROGRAM LOANS AS OF CUT-OFF DATE LOAN GROUP
- -------------------- --------- ------------------- ----------
<S> <C> <C> <C>
Progressive Series I .................. 898 $140,661,512 81.52%
Progressive Series II ................. 51 7,288,230 4.22
Progressive Series III ................ 16 2,337,975 1.36
Progressive Series III+ ............... 5 667,103 0.39
Progressive Express Series I .......... 51 8,656,015 5.02
Progressive Express Series II ......... 51 10,082,386 5.84
Progressive Express Series III ........ 8 1,101,410 0.64
Progressive Express Series V .......... 1 211,500 0.12
Other Underwriting Programs............ 9 1,530,314 0.89
----- ------------ ------
Total.............................. 1,090 $172,536,445 100.00%
===== ============ ======
</TABLE>
- --------
(1) All of the Mortgage Loans were acquired by ICI funding and were
underwritten pursuant to or in accordance with, the standards of either
ICI Funding's Progressive Series Program or its Progressive Express
Program.
YEAR OF FIRST PAYMENT OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
YEAR OF FIRST PAYMENT LOANS AS OF CUT-OFF DATE LOAN GROUP
- --------------------- --------- ------------------- ----------
<S> <C> <C> <C>
1995................................... 2 $ 296,150 1.51%
1996................................... 171 17,292,234 88.27
1997................................... 12 2,002,650 10.22
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average seasoning of the Group II
Mortgage Loans is expected to be approximately 3 months.
TYPES OF MORTGAGED PROPERTIES SECURING
GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PROPERTY TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
Single-Family.......................... 114 $12,422,496 63.41%
Two- to Four-Family.................... 39 4,019,475 20.52
Planned Unit Development............... 18 2,026,422 10.34
Condominium............................ 14 1,122,641 5.73
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
A-5
<PAGE>
OCCUPANCY OF MORTGAGED PROPERTIES
SECURING GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE LOAN GROUP
- ---------------- --------- ------------------- ----------
<S> <C> <C> <C>
Primary Residence...................... 112 $13,670,724 69.78%
Second Home............................ 8 1,135,483 5.80
Investor Property...................... 65 4,784,828 24.42
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) Based on representations of the Mortgagor at the time of Group II Mortgage
Loan Origination.
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTY SECURING GROUP II MORTGAGE
LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
STATES LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------ --------- ------------------- ----------
<S> <C> <C> <C>
Arizona................................ 2 $ 332,124 1.70%
California............................. 41 4,954,436 25.29
Colorado............................... 1 69,871 0.36
Connecticut............................ 3 477,759 2.44
District of Columbia................... 1 55,978 0.29
Florida................................ 50 3,992,867 20.38
Georgia................................ 1 49,485 0.25
Idaho.................................. 1 99,119 0.51
Illinois............................... 3 122,250 0.62
Indiana................................ 1 35,849 0.18
Maryland............................... 2 355,880 1.82
Massachusetts.......................... 6 812,224 4.15
Michigan............................... 1 64,395 0.33
Montana................................ 1 112,450 0.57
Nevada................................. 3 336,776 1.72
New Jersey............................. 29 4,407,584 22.50
New Mexico............................. 1 52,372 0.27
New York............................... 11 1,164,846 5.95
North Carolina......................... 2 120,479 0.62
Oregon................................. 1 231,755 1.18
Pennsylvania........................... 5 261,466 1.34
Rhode Island........................... 1 62,930 0.32
Texas.................................. 6 557,737 2.85
Utah................................... 2 158,795 0.81
Virginia............................... 1 73,722 0.38
Washington............................. 6 485,890 2.48
Wisconsin.............................. 3 141,993 0.73
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, no more than approximately 2.62% of the aggregate
Outstanding Principal Balance of the Group II Mortgage Loans is expected to
be secured by properties located in any one zip code.
A-6
<PAGE>
LOAN PURPOSE OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOAN GROUP
- ------------ --------- ------------------- ----------
<S> <C> <C> <C>
Purchase............................... 98 $10,239,523 52.27%
Rate and Term Refinance................ 25 2,703,479 13.80
Cash-Out Refinance..................... 62 6,648,032 33.93
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
DISTRIBUTION OF ORIGINAL GROUP II MORTGAGE LOAN AMOUNTS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL MORTGAGE LOAN AMOUNT LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
$ 50,000 or less....................... 36 $ 1,468,025 7.49%
$ 50,001 - $100,000.................... 78 5,773,501 29.47
$100,001 - $150,000.................... 39 4,753,517 24.26
$150,001 - $200,000.................... 11 1,921,280 9.81
$200,001 - $250,000.................... 10 2,239,556 11.43
$250,001 - $300,000.................... 8 2,230,643 11.39
$300,001 - $350,000.................... 1 333,648 1.70
$350,001 - $400,000.................... 1 357,022 1.82
$500,001 - $550,000.................... 1 513,843 2.62
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the average Outstanding Principal Balance of the
Group II Mortgage Loan is expected to be approximately $105,897.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE LOAN GROUP
- ----------------------------- --------- ------------------- ----------
<S> <C> <C> <C>
50.00% or less......................... 9 $ 790,345 4.03%
50.01% - 55.00%........................ 5 695,105 3.55
55.01% - 60.00%........................ 7 482,351 2.46
60.01% - 65.00%........................ 12 742,334 3.79
65.01% - 70.00%........................ 22 2,097,514 10.71
70.01% - 75.00%........................ 30 3,676,482 18.77
75.01% - 80.00%........................ 45 5,867,637 29.95
80.01% - 85.00%........................ 6 885,872 4.52
85.01% - 90.00%........................ 46 4,139,760 21.13
90.01% - 95.00%........................ 3 213,635 1.09
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Group II Mortgage Loans is expected to be approximately
76.20%.
A-7
<PAGE>
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
NUMBER OF AGGREGATE PRINCIPAL MORTGAGE
MORTGAGE BALANCE OUTSTANDING LOAN
MORTGAGE RATE LOANS AS OF CUT-OFF DATE GROUP
- ------------- --------- ------------------- --------
<S> <C> <C> <C>
9.875%................................. 48 $ 6,289,627 32.11%
9.990%................................. 2 242,964 1.24
10.000%................................. 20 1,817,280 9.28
10.125%................................. 18 2,145,454 10.95
10.250%................................. 6 663,494 3.39
10.375%................................. 9 1,221,489 6.24
10.500%................................. 16 1,709,031 8.72
10.625%................................. 6 436,685 2.23
10.750%................................. 13 1,347,320 6.88
10.850%................................. 1 51,821 0.27
10.875%................................. 6 480,963 2.46
10.950%................................. 1 65,180 0.33
11.000%................................. 7 519,703 2.65
11.125%................................. 3 244,185 1.25
11.150%................................. 1 51,466 0.26
11.250%................................. 2 505,522 2.58
11.375%................................. 2 136,894 0.70
11.500%................................. 8 570,631 2.91
11.750%................................. 3 223,905 1.14
11.875%................................. 1 92,909 0.47
11.950%................................. 1 106,211 0.54
12.000%................................. 2 117,943 0.60
12.375%................................. 1 90,827 0.46
12.500%................................. 2 156,587 0.80
12.750%................................. 2 138,547 0.71
12.875%................................. 1 44,979 0.23
13.750%................................. 1 29,795 0.15
15.250%................................. 1 44,169 0.23
15.990%................................. 1 45,456 0.23
--- ----------- ------
Total 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Mortgage Loans is expected to be approximately 10.410% per annum.
ORIGINAL TERM OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL TERM LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------- --------- ------------------- ----------
<S> <C> <C> <C>
180 or less............................ 9 $ 574,159 2.93%
181 - 360.............................. 176 19,016,875 97.07
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) As of the Cut-off Date, the weighted average calculated remaining term of
the Group II Mortgage Loans is expected to be approximately 351 months.
A-8
<PAGE>
DOCUMENTATION TYPE OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE LOAN GROUP
- ------------------ --------- ------------------- ----------
<S> <C> <C> <C>
Full................................... 84 $ 7,902,592 40.34%
Alternative............................ 7 676,546 3.45
Reduced/Stated Income.................. 83 9,634,680 49.18
No Income/No Asset..................... 11 1,377,216 7.03
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
UNDERWRITING PROGRAMS OF THE GROUP II MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
UNDERWRITING PROGRAM LOANS CUT-OFF DATE LOAN GROUP
- -------------------- --------- ------------------- ----------
<S> <C> <C> <C>
Progressive Series I................... 76 $ 7,186,341 36.69%
Progressive Series II.................. 15 1,752,635 8.95
Progressive Series III................. 40 5,281,737 26.96
Progressive Series III+................ 32 3,268,378 16.68
Progressive Series IV.................. 7 617,578 3.15
Progressive Series V................... 7 470,886 2.40
Progressive Express Series III......... 3 535,408 2.73
Progressive Express Series IV.......... 3 371,829 1.90
Progressive Express Series VI.......... 1 80,219 0.41
Other Underwriting Programs............ 1 26,022 0.13
--- ----------- ------
Total.............................. 185 $19,591,034 100.00%
=== =========== ======
</TABLE>
- --------
(1) All of the Mortgage Loans were acquired by ICI funding and were
underwritten pursuant to, or in accordance with, the standards of either
ICI Funding's Progressive Series Program or its Progressive Express
Program.
A-9
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
BEAR STEARNS MORTGAGE SECURITIES INC.
SELLER
----------
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), which may be sold from time to time in one or more Series on
terms determined at the time of sale and described in the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of
one or more trust funds (each a "Trust Fund"). As specified in the related
Prospectus Supplement, a Trust Fund for a Series of Certificates will include
certain mortgage-related assets (the "Mortgage Assets") consisting of (i) first
lien mortgage loans or participations therein secured by one- to four-family
residential properties ("Single Family Loans"), (ii) first lien mortgage loans
or participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by security
interests or similar liens on shares in cooperative housing corporations and the
related proprietary leases or occupancy agreements ("Cooperative Loans"), (iv)
conditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing ("Contracts"), (v)
mortgage pass-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") or other government agencies or government-sponsored agencies or (vi)
privately issued mortgage-backed securities ("Private Mortgage-Backed
Securities"). If specified in the related Prospectus Supplement, certain
Certificates will evidence the entire beneficial ownership interest in a Trust
Fund which will contain a beneficial ownership interest in another Trust Fund
which will contain the Mortgage Assets. The Mortgage Assets will be acquired by
Bear Stearns Mortgage Securities Inc. (the "Seller") from one or more
institutions which may be affiliates of the Seller (each, a "Lender") and
conveyed by the Seller to the related Trust Fund. A Trust Fund also may include
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other assets to the extent
described in the related Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Certificates
of such Series. One or more classes of Certificates of a Series may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other classes of Certificates of such Series or after the
occurrence of specified events or may be required to absorb one or more types of
losses prior to one or more other classes of Certificates, in each case as
specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Certificates of a Series will be made only from the assets of the related Trust
Fund.
The Certificates will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality or by any other person. Unless otherwise
specified in the related Prospectus Supplement, the only obligations of the
Seller with respect to a Series of Certificates will be to obtain certain
representations and warranties from the Lenders or other third parties and to
assign to the trustee (the "Trustee") for the related Series of Certificates the
Seller's rights with respect to such representations and warranties. The
principal obligations of one or more master servicers (each, a "Master
Servicer") named in the Prospectus Supplement with respect to the related Series
of Certificates will be limited to its or their contractual servicing
obligations, including any obligation to advance delinquent payments on the
Mortgage Assets in the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by the
rate of payment of principal (including prepayments) on the Mortgage Assets in
the related Trust Fund and the timing of receipt of such payments as described
herein and in the related Prospectus Supplement. A Trust Fund may be subject to
early termination under the circumstances described herein and in the related
Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made
to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Certificates of
any Series and there can be no assurance that a secondary market for any
Certificates will develop. This Prospectus may not be used to consummate sales
of a Series of Certificates unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. All
Certificates will be distributed by, or sold by underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is October 10, 1996.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series to
be offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates; (ii) the rate of interest (the "Pass-Through Rate") or method of
determining the amount of interest, if any, to be passed through to each such
class; (iii) the aggregate principal amount, if any, relating to each such
class; (iv) the distribution dates (each a "Distribution Date") for interest
and principal payments and, if applicable, the initial and final scheduled
Distribution Dates for each class; (v) if applicable, the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class
of Certificates; (vi) information as to the nature and extent of subordination
with respect to any class of Certificates that is subordinate to any other
class; (vii) information as to the assets comprising the Trust Fund, including
the general characteristics of the Mortgage Assets included therein and, if
applicable, the amount and source of any reserve fund (a "Reserve Account"),
and the insurance, letters of credit, guarantees, or other instruments or
agreements included in the Trust Fund; (viii) the circumstances, if any, under
which the Trust Fund may be subject to early termination; (ix) additional
information with respect to the plan of distribution of such Certificates; (x)
whether one or more REMIC elections will be made and designation of the
regular interests and residual interests; (xi) information as to the Trustee;
and (xii) information as to the Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of Certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of
which this Prospectus is a part. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, Northwestern
Atrium Center, 500 West Madison Street - Suite 1400, Chicago, Illinois 60661;
and New York Regional Office, 7 World Trade Center - 13th Floor, New York, New
York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Certificates offered hereby and thereby nor an offer of the Certificates to
any person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, with respect to a
series of Certificates subsequent to the date of this Prospectus and the
related Prospectus Supplement and prior to the termination of the offering of
such series of Certificates shall be deemed to be incorporated by reference in
this Prospectus as supplemented by the related Prospectus Supplement. If so
specified in any such documents, such document shall also be deemed to be
incorporated by reference in the Registration Statement of which this
Prospectus forms a part.
Any statement contained herein or in a Prospectus Supplement for a series
of Certificates or in a document
-2-
<PAGE>
incorporated or deemed to be incorporated by reference herein or therein shall
be deemed to be modified or superseded for purposes of this Prospectus and
such Prospectus Supplement and, if applicable, the Registration Statement to
the extent that a statement contained herein or therein or in any subsequently
filed document which also is or is deemed to be incorporated by reference
herein or therein modifies or supersedes such statement, except to the extent
that such subsequently filed document expressly states otherwise. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus or the related
Prospectus Supplement or, if applicable, the Registration Statement.
The Depositor will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, Bear Stearns Mortgage Securities Inc.,
245 Park Avenue, New York, New York 10167. Telephone requests for such copies
should be directed to the President at (212) 272-2000.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Certificateholders. See "Description of the Certificates-
Reports to Certificateholders."
-3-
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement which will be prepared in connection with each Series of
Certificates.
Title of Securities........ Mortgage Pass-Through Certificates (Issuable in
Series).
Seller..................... Bear Stearns Mortgage Securities Inc., a Delaware
corporation and a wholly-owned subsidiary of Bear
Stearns Mortgage Capital Corporation. See "The
Seller."
Trustee.................... The Trustee for each Series of Certificates will
be specified in the related Prospectus Supplement.
Master Servicer............ One or more entities named as a Master Servicer in
the related Prospectus Supplement, which may be an
affiliate of the Seller. See "The Pooling and
Servicing Agreement -Certain Matters Regarding the
Master Servicer and the Seller."
Trust Fund Assets.......... A Trust Fund for a Series of Certificates will
include the Mortgage Assets consisting of (i) a
pool (a "Mortgage Pool") of Single Family Loans,
Multifamily Loans, Cooperative Loans or Contracts
(collectively, the "Mortgage Loans"), (ii) Agency
Securities or (iii) Private Mortgage-Backed
Securities, together with payments in respect of
such Mortgage Assets and certain other accounts,
obligations or agreements, in each case as
specified in the related Prospectus Supplement.
A. Single Family, Cooperative
and Multi-family Loans.... Unless otherwise specified in the related
Prospectus Supplement, Single Family Loans will be
secured by first mortgage liens on one- to four-
family residential properties. Unless otherwise
specified in the related Prospectus Supplement,
Cooperative Loans will be secured by security
interests in shares issued by private, nonprofit,
cooperative housing corporations ("Cooperatives")
and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives'
buildings. Single Family Loans and Cooperative
Loans may be conventional loans (i.e., loans that
are not insured or guaranteed by any governmental
agency), insured by the Federal Housing Authority
("FHA") or partially guaranteed by the Veterans
Administration ("VA") as specified in the related
Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, Single
Family Loans and Cooperative Loans will all have
individual principal balances at origination of
not less than $25,000 and not more than
$1,000,000, and original terms to stated maturity
of 15 to 40 years.
Multifamily Loans will be secured by first
mortgage liens on rental apartment buildings or
projects containing five or more residential
units, including apartment buildings owned by
Cooperatives. Such
-4-
<PAGE>
loans may be conventional loans or insured by the
FHA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the
related Prospectus Supplement, Multifamily Loans
will all have individual principal balances at
origination of not less than $25,000 and original
terms to stated maturity of not more than 40
years.
The payment terms of the Mortgage Loans to be
included in a Trust Fund will be described in the
related Prospectus Supplement and may include any
of the following features or combinations thereof
or other features described in the related
Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a
rate adjustable from time to time in
relation to an index, a rate that is fixed
for a period of time or under certain
circumstances and is followed by an
adjustable rate, a rate that otherwise
varies from time to time, or a rate that is
convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate
may be subject to periodic limitations,
maximum rates, minimum rates or a
combination of such limitations. Accrued
interest may be deferred and added to the
principal of a Mortgage Loan for such
periods and under such circumstances as may
be specified in the related Prospectus
Supplement. Mortgage Loans may provide for
the payment of interest at a rate lower than
the specified interest rate on the Mortgage
Loan (the "Mortgage Rate") for a period of
time or for the life of the Mortgage Loan,
and the amount of any difference may be
contributed from funds supplied by the
seller of the Mortgaged Property or another
source ("Buydown Loans") or may be treated
as accrued interest and added to the
principal of the Mortgage Loan.
(b) Principal may be payable on a level debt
service basis to fully amortize the Mortgage
Loan over its term, may be calculated on the
basis of an assumed amortization schedule
that is significantly longer than the
original term to maturity or on an interest
rate that is different from the interest
rate on the Mortgage Loan or may not be
amortized during all or a portion of the
original term. Payment of all or a
substantial portion of the principal may be
due on maturity ("balloon" payments).
Principal may include interest that has been
deferred and added to the principal balance
of the Mortgage Loan.
(c) Payments of principal and interest may be
fixed for the life of the Mortgage Loan, may
increase over a specified period of time or
may change from period to period. Mortgage
Loans may include limits on periodic
increases or decreases in the amount of
monthly payments and may include maximum or
minimum amounts of monthly payments.
-5-
<PAGE>
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the
life of the Mortgage Loan or may decline
over time, and may be prohibited for the
life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain
Mortgage Loans may permit prepayments after
expiration of the applicable lockout period
and may require the payment of a prepayment
fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless
the prepayment occurs during specified time
periods. The Mortgage Loans may include due-
on-sale clauses which permit the mortgagee
to demand payment of the entire Mortgage
Loan in connection with the sale or certain
transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by
persons meeting the then applicable
underwriting standards of the Lender.
Certain Mortgage Loans may be originated or
acquired in connection with employee relocation
programs. The real property constituting security
for repayment of a Mortgage Loan may be located in
any one of the fifty states or the District of
Columbia. Unless otherwise specified in the
related Prospectus Supplement, all of the Mortgage
Loans will be covered by standard hazard insurance
policies insuring against losses due to fire and
various other causes. The Mortgage Loans will be
covered by primary mortgage insurance policies to
the extent provided in the related Prospectus
Supplement. All Mortgage Loans will have been
purchased by the Seller, either directly or
through an affiliate, from Lenders.
B. Contracts............ Contracts will consist of conditional sales and
installment sales or loan agreements secured by
new or used Manufactured Homes (as defined
herein). Contracts may be conventional loans,
insured by the FHA or partially guaranteed by the
VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the
related Prospectus Supplement, each Contract will
be fully amortizing and will bear interest at a
fixed accrual percentage rate ("APR"). Unless
otherwise specified in the related Prospectus
Supplement, Contracts will all have individual
principal balances at origination of not less than
$10,000 and not more than $1,000,000 and original
terms to stated maturity of 5 to 30 years.
C. Agency Securities.... The Agency Securities will consist of (i) fully
modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and
interest by the Government National Mortgage
Association ("GNMA Certificates"), (ii) Guaranteed
Mortgage Pass-Through Certificates issued and
guaranteed as to timely payment of principal and
interest by the Federal National Mortgage
Association ("FNMA Certificates"), (iii) Mortgage
Participation Certificates issued and guaranteed
as to timely payment of interest and, unless
otherwise specified in the related Prospectus
Supplement, ultimate payment of principal by the
-6-
<PAGE>
Federal Home Loan Mortgage Corporation ("FHLMC
Certificates"), (iv) stripped mortgage-backed
securities representing an undivided interest in
all or a part of either the principal
distributions (but not the interest distributions)
or the interest distributions (but not the
principal distributions) or in some specified
portion of the principal and interest
distributions (but not all of such distributions)
on certain GNMA, FNMA, FHLMC or other government
agency or government-sponsored agency Certificates
and, unless otherwise specified in the Prospectus
Supplement, guaranteed to the same extent as the
underlying securities, (v) another type of
guaranteed pass-through certificate issued or
guaranteed by GNMA, FNMA, FHLMC or another
government agency or government-sponsored agency
and described in the related Prospectus
Supplement, or (vi) a combination of such Agency
Securities. All GNMA Certificates will be backed
by the full faith and credit of the United States.
No FNMA or FHLMC Certificates will be backed,
directly or indirectly, by the full faith and
credit of the United States. The Agency Securities
may consist of pass-through securities issued
under the GNMA I Program, the GNMA II Program,
FHLMC's Cash or Guarantor Program or another
program specified in the Prospectus Supplement.
The payment characteristics of the Mortgage Loans
underlying the Agency Securities will be described
in the related Prospectus Supplement.
D. Private Mortgage-Backed
Securities........... Private Mortgage-Backed Securities may include (i)
mortgage participations or pass-through
certificates representing beneficial interests in
certain Mortgage Loans or (ii) Collateralized
Mortgage Obligations ("CMOs") secured by such
Mortgage Loans. Private Mortgage-Backed Securities
may include stripped mortgage-backed securities
representing an undivided interest in all or a
part of any of the principal distributions (but
not the interest distributions) or the interest
distributions (but not the principal
distributions) or in some specified portion of the
principal and interest distributions (but not all
of such distributions) on certain mortgage loans.
Although individual Mortgage Loans underlying a
Private Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the
Private Mortgage-Backed Securities themselves will
not be so insured or guaranteed. See "The Trust
Fund-Private Mortgage-Backed Securities." Unless
otherwise specified in the Prospectus Supplement
relating to a Series of Certificates, payments on
the Private Mortgage-Backed Securities will be
distributed directly to the Trustee as registered
owner of such Private Mortgage-Backed Securities.
See "The Trust Fund-Private Mortgage-Backed
Securities."
The related Prospectus Supplement for a Series
will specify (i) the aggregate approximate
principal amount and type of any Private Mortgage-
Backed Securities to be included in the Trust Fund
for such Series; (ii) certain characteristics of
the Mortgage Loans which comprise the underlying
assets for the Private Mortgage-Backed
-7-
<PAGE>
Securities including to the extent available (A)
the payment features of such Mortgage Loans, (B)
the approximate aggregate principal amount, if
known, of the underlying Mortgage Loans which are
insured or guaranteed by a governmental entity,
(C) the servicing fee or range of servicing fees
with respect to the Mortgage Loans, and (D) the
minimum and maximum stated maturities of the
Mortgage Loans at origination; (iii) the maximum
original term-to-stated maturity of the Private
Mortgage-Backed Securities; (iv) the weighted
average term-to-stated maturity of the Private
Mortgage-Backed Securities; (v) the pass-through
or certificate rate or ranges thereof for the
Private Mortgage-Backed Securities; (vi) the
weighted average pass-through or certificate rate
of the Private Mortgage-Backed Securities; (vii)
the issuer of the Private Mortgage-Backed
Securities (the "PMBS Issuer"), the servicer of
the Private Mortgage-Backed Securities (the "PMBS
Servicer") and the trustee of the Private
Mortgage-Backed Securities (the "PMBS Trustee");
(viii) certain characteristics of credit support,
if any, such as reserve funds, insurance policies,
letters of credit, financial guaranty insurance
policies or third party guarantees, relating to
the Mortgage Loans underlying the Private
Mortgage-Backed Securities, or to such Private
Mortgage-Backed Securities themselves; (ix) the
terms on which underlying Mortgage Loans for such
Private Mortgage-Backed Securities may, or are
required to, be repurchased prior to stated
maturity; and (x) the terms on which substitute
Mortgage Loans may be delivered to replace those
initially deposited with the PMBS Trustee. See
"The Trust Fund."
E. Pre-Funding and
Capitalized Interest
Accounts.............. If specified in the related Prospectus Supplement,
a Trust Fund will include one or more segregated
trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for
the related Series. If so specified, on the
closing date for such Series, a portion of the
proceeds of the sale of the Certificates of such
Series (such amount, the "Pre-Funded Amount") will
be deposited in the Pre-Funding Account and may be
used to purchase additional Primary Assets during
the period of time, not to exceed six months,
specified in the related Prospectus Supplement
(the "Pre-Funding Period"). The Primary Assets to
be so purchased will be required to have certain
characteristics specified in the related
Prospectus Supplement. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at
the end of the Pre-Funding Period, such amount
will be applied in the manner specified in the
related Prospectus Supplement to prepay the
Certificates of the applicable Series. The amount
initially deposited in a pre-funding account for a
Series of Certificates will not exceed fifty
percent of the aggregate principal amount of such
Series of Certificates.
-8-
<PAGE>
If a Pre-Funding Account is established, one or
more segregated trust accounts (each, a
"Capitalized Interest Account") may be established
and maintained with the Trustee for the related
Series. On the closing date for such Series, a
portion of the proceeds of the sale of the
Certificates of such Series will be deposited in
the Capitalized Interest Account and used to fund
the excess, if any, of (x) the sum of (i) the
amount of interest accrued on the Certificates of
such Series and (ii) if specified in the related
Prospectus Supplement, certain fees or expenses
during the Pre-Funding Period such as trustee fees
and credit enhancement fees, over (y) the amount
of interest available therefor from the Primary
Assets in the Trust Fund. Any amounts on deposit
in the Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person
specified in the related Prospectus Supplement.
Description of the
Certificates.......... Each Certificate will represent a beneficial
ownership interest in a Trust Fund created by the
Seller pursuant to a Pooling and Servicing
Agreement (each, an "Agreement") among the Seller,
the Master Servicer(s) and the Trustee for the
related Series. The Certificates of any Series may
be issued in one or more classes as specified in
the related Prospectus Supplement. A Series of
Certificates may include one or more classes of
senior Certificates (collectively, the "Senior
Certificates") which receive certain preferential
treatment specified in the related Prospectus
Supplement with respect to one or more classes of
subordinate Certificates (collectively, the
"Subordinated Certificates"). Certain Series or
classes of Certificates may be covered by
insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies,
third party guarantees or other forms of credit
enhancement as described herein and in the related
Prospectus Supplement.
One or more classes of Certificates of each Series
(i) may be entitled to receive distributions
allocable only to principal, only to interest or
to any combination thereof; (ii) may be entitled
to receive distributions only of prepayments of
principal throughout the lives of the Certificates
or during specified periods; (iii) may be
subordinated in the right to receive distributions
of scheduled payments of principal, prepayments of
principal, interest or any combination thereof to
one or more other classes of Certificates of such
Series throughout the lives of the Certificates or
during specified periods or may be subordinated
with respect to certain losses or delinquencies;
(iv) may be entitled to receive such distributions
only after the occurrence of events specified in
the Prospectus Supplement; (v) may be entitled to
receive distributions in accordance with a
schedule or formula or on the basis of collections
from designated portions of the assets in the
related Trust Fund; (vi) as to Certificates
entitled to distributions allocable to interest,
may be entitled to receive interest at a fixed
rate or a rate that is subject to change from time
to time; and (vii) as to Certificates entitled to
distributions allocable to interest, may be
-9-
<PAGE>
entitled to distributions allocable to interest
only after the occurrence of events specified in
the Prospectus Supplement and may accrue interest
until such events occur, in each case as specified
in the Prospectus Supplement. The timing and
amounts of such distributions may vary among
classes, over time, or otherwise as specified in
the related Prospectus Supplement.
Distributions on the
Certificates.......... Distributions on the Certificates entitled thereto
will be made monthly, quarterly, semi-annually or
at such other intervals and on such other
Distribution Dates specified in the Prospectus
Supplement solely out of the payments received in
respect of the assets of the related Trust Fund or
other assets pledged for the benefit of the
Certificates as specified in the related
Prospectus Supplement. The amount allocable to
payments of principal and interest on any
Distribution Date will be determined as specified
in the Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement, all
distributions will be made pro rata to
Certificateholders of the class entitled thereto,
and the aggregate original principal balance of
the Certificates will equal the aggregate
distributions allocable to principal that such
Certificates will be entitled to receive. If
specified in the Prospectus Supplement, the
Certificates will have an aggregate original
principal balance equal to the aggregate unpaid
principal balance of the Mortgage Assets as of a
date specified in the related Prospectus
Supplement related to the creation of the Trust
Fund (the "Cut-off Date") and will bear interest
in the aggregate at a rate equal to the interest
rate borne by the underlying Mortgage Loans,
Agency Securities or Private Mortgage-Backed
Securities, net of the aggregate servicing fees
and any other amounts specified in the Prospectus
Supplement. If specified in the Prospectus
Supplement, the aggregate original principal
balance of the Certificates and interest rates on
the classes of Certificates will be determined
based on the cash flow on the Mortgage Assets. The
Pass-Through Rate at which interest will be passed
through to holders of Certificates entitled
thereto may be a fixed rate or a rate that is
subject to change from time to time from the time
and for the periods, in each case as specified in
the Prospectus Supplement. Any such rate may be
calculated on a loan-by-loan, weighted average or
other basis, in each case as described in the
Prospectus Supplement.
Credit Enhancement.... The assets in a Trust Fund or the Certificates of
one or more classes in the related Series may have
the benefit of one or more types of credit
enhancement described in the related Prospectus
Supplement. The protection against losses afforded
by any such credit support will be limited. Such
credit enhancement may include one or more of the
following types:
A. Subordination......... The rights of the holders of the Subordinated
Certificates of a Series to receive distributions
with respect to the assets in the related Trust
Fund will be subordinated to such rights of the
holders of the Senior Certificates of the same
Series to the extent described in the related
Prospectus Supplement. This subordination is
intended to enhance
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the likelihood of regular receipt by holders of
Senior Certificates of the full amount of payments
which such holders would be entitled to receive if
there had been no losses or delinquencies. The
protection afforded to the holders of Senior
Certificates of a Series by means of the
subordination feature may be accomplished by (i)
the preferential right of such holders to receive,
prior to any distribution being made in respect of
the related Subordinated Certificates, the amounts
of principal and interest due them on each
Distribution Date out of the funds available for
distribution on such date in the related
Certificate Account and, to the extent described
in the related Prospectus Supplement, by the right
of such holders to receive future distributions on
the assets in the related Trust Fund that would
otherwise have been payable to the Subordinated
Certificateholders; (ii) reducing the ownership
interest of the related subordinated Certificates;
(iii) a combination of clauses (i) and (ii) above;
or (iv) as otherwise described in the related
Prospectus Supplement. The protection afforded to
the holders of Senior Certificates of a Series by
means of the subordination feature also may be
accomplished by allocating certain types of losses
or delinquencies to the Subordinated Certificates
to the extent described in the related Prospectus
Supplement.
If so specified in the related Prospectus
Supplement, the same class of Certificates may be
Senior Certificates with respect to certain types
of payments or certain types of losses or
delinquencies and Subordinated Certificates with
respect to other types of payments or types of
losses or delinquencies. If so specified in the
related Prospectus Supplement, subordination may
apply only in the event of certain types of losses
not covered by other forms of credit support, such
as hazard losses not covered by standard hazard
insurance policies or losses due to the bankruptcy
of the borrower. If specified in the Prospectus
Supplement, a reserve fund may be established and
maintained by the deposit therein of distributions
allocable to the holders of Subordinated
Certificates until a specified level is reached.
The related Prospectus Supplement will set forth
information concerning the amount of subordination
of a class or classes of Subordinated Certificates
in a Series, the circumstances in which such
subordination will be applicable, the manner, if
any, in which the amount of subordination will
decrease over time, the manner of funding the
related reserve fund, if any, and the conditions
under which amounts in any such reserve fund will
be used to make distributions to holders of Senior
Certificates or released from the related Trust
Fund.
B. Reserve Accounts...... One or more Reserve Accounts may be established
and maintained for each Series. The related
Prospectus Supplement will specify whether or not
any such Reserve Account will be included in the
corpus of the Trust Fund for such Series and will
also specify the manner of funding the related
Reserve Account and the conditions under which the
amounts in any such Reserve Account will be used
to make distributions to holders of Certificates
of a particular class or released from the related
Trust Fund.
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<PAGE>
C. Pool Insurance Policy. A mortgage pool insurance policy or policies
(the "Pool Insurance Policy") may be obtained and
maintained for each Series pertaining to Single
Family Loans, Cooperative Loans or Contracts,
limited in scope, covering defaults on the related
Single Family Loans, Cooperative Loans or
Contracts in an initial amount equal to a
specified percentage of the aggregate principal
balance of all Single Family Loans, Cooperative
Loans or Contracts included in the Mortgage Pool
as of the Cut-off Date or such other date as is
specified in the related Prospectus Supplement.
D. Special Hazard
Insurance Policy...... In the case of Single Family Loans, Cooperative
Loans or Contracts, certain physical risks that
are not otherwise insured against by standard
hazard insurance policies may be covered by a
special hazard insurance policy or policies (the
"Special Hazard Insurance Policy"). Unless
otherwise specified in the related Prospectus
Supplement, each Special Hazard Insurance Policy
will be limited in scope and will cover losses in
an initial amount equal to the greatest of (i) a
specified percentage of the aggregate principal
balance of the Single Family Loans, Cooperative
Loans or Contracts as of the related Cut-off Date,
(ii) twice the unpaid principal balance as of the
related Cut-off Date of the largest Single Family
Loan, Cooperative Loan or Contract in the related
Mortgage Pool, or (iii) the aggregate principal
balance of Single Family Loans, Cooperative Loans
or Contracts as of the Cut-off Date secured by
property in any single zip code concentration.
E. Bankruptcy Bond....... A bankruptcy bond or bonds (the "Bankruptcy Bond")
may be obtained covering certain losses resulting
from action which may be taken by a bankruptcy
court in connection with a Single Family Loan,
Cooperative Loan or Contract. The level of
coverage of each Bankruptcy Bond will be specified
in the related Prospectus Supplement.
F. FHA Insurance and VA
Guarantee............. All or a portion of the Mortgage Loans in a
Mortgage Pool may be insured by FHA insurance and
all or a portion of the Single Family Loans or
Contracts in a Mortgage Pool may be partially
guaranteed by the VA.
G. Other Arrangements.... Other arrangements as described in the related
Prospectus Supplement including, but not limited
to, one or more letters of credit, financial
guaranty insurance policies or third party
guarantees, interest rate or other swap
agreements, caps, collars or floors, may be used
to provide coverage for certain risks of defaults
or losses. These arrangements may be in addition
to or in substitution for any forms of credit
support described in the Prospectus. Any such
arrangement must be acceptable to each nationally
recognized rating agency that rates the related
Series of Certificates (the "Rating Agency").
H. Cross Support......... If specified in the Prospectus Supplement, the
beneficial ownership of separate groups of assets
or separate Trust Funds may be
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evidenced by separate classes of the related
Series of Certificates. In such case, credit
support may be provided by a cross-support feature
which requires that distributions be made with
respect to certain Certificates evidencing
beneficial ownership of one or more asset groups
or Trust Funds prior to distributions to other
Certificates evidencing a beneficial ownership
interest in other asset groups or Trust Funds. If
specified in the Prospectus Supplement, the
coverage provided by one or more forms of credit
support may apply concurrently to two or more
separate Trust Funds, without priority among such
Trust Funds, until the credit support is
exhausted. If applicable, the Prospectus
Supplement will identify the asset groups or Trust
Funds to which such credit support relates and the
manner of determining the amount of the coverage
provided thereby and of the application of such
coverage to the identified asset groups or Trust
Funds.
Advances.............. Unless otherwise specified in the related
Prospectus Supplement, each Master Servicer and,
if applicable, each mortgage servicing institution
that services a Mortgage Loan in a Mortgage Pool
on behalf of a Master Servicer (a "Sub-Servicer")
will be obligated to advance amounts corresponding
to delinquent principal and interest payments on
such Mortgage Loan until the date on which the
related Mortgaged Property is sold at a
foreclosure sale or the related Mortgage Loan is
otherwise liquidated. Any such obligation to make
advances may be limited to amounts due holders of
Senior Certificates of the related Series, to
amounts deemed to be recoverable from late
payments or liquidation proceeds, for specified
periods or any combination thereof, or as
otherwise specified in the related Prospectus
Supplement. See "Description of the Certificates-
Advances." Advances will be reimbursable to the
extent described herein and in the related
Prospectus Supplement.
Optional Termination.. The Master Servicer, the holders of the residual
interests in a REMIC, or any other entity
specified in the related Prospectus Supplement may
have the option to effect early retirement of a
Series of Certificates through the purchase of the
Mortgage Assets and other assets in the related
Trust Fund under the circumstances and in the
manner described in "The Pooling and Servicing
Agreement-Termination; Optional Termination."
Legal Investment...... Unless otherwise specified in the related
Prospectus Supplement, each class of Certificates
offered hereby and by the related Prospectus
Supplement will constitute "mortgage-related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") and, as
such, will be legal investments for certain types
of institutional investors to the extent provided
in SMMEA, subject, in any case, to any other
regulations which may govern investments by such
institutional investors. See "Legal Investment."
Institutions whose investment activities are
subject to legal investment laws and regulations
or to review by certain regulatory authorities may
be subject to restrictions on investment in the
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Certificates. Any such institution should consult
its own legal advisors in determining whether and
to what extent there may be restrictions on its
ability to invest in the Certificates. See "Legal
Investment" herein.
Certain Federal Income
Tax Consequences...... The federal income tax consequences of the
purchase, ownership and disposition of the
Certificates of each series will depend on whether
an election is made to treat the corresponding
Trust Fund (or certain assets of the Trust Fund)
as a REMIC under the Internal Revenue Code of
1986, as amended (the "Code").
REMIC. If an election is to be made to treat the
-----
Trust Fund for a series of Certificates as a REMIC
for federal income tax purposes, the related
Prospectus Supplement will specify which class or
classes thereof will be designated as regular
interests in the REMIC ("REMIC Regular
Certificates") and which class of Certificates
will be designated as the residual interest in the
REMIC ("REMIC Residual Certificates").
For federal income tax purposes, REMIC Regular
Certificates generally will be treated as debt
obligations of the Trust Fund with payment terms
equivalent to the terms of such Certificates.
Holders of REMIC Regular Certificates will be
required to report income with respect to such
Certificates under an accrual method, regardless
of their normal tax accounting method. Original
issue discount, if any, on REMIC Regular
Certificates will be includible in the income of
the Holders thereof as it accrues, in advance of
receipt of the cash attributable thereto, which
rate of accrual will be determined based on a
reasonable assumed prepayment rate. The REMIC
Residual Certificates generally will not be
treated as evidences of indebtedness for federal
income tax purposes, but instead, as representing
rights to the taxable income or net loss of the
REMIC.
Each holder of a REMIC Residual Certificate will
be required to take into account separately its
pro rata portion of the REMIC's taxable income or
loss. Certain income of a REMIC (referred to as
"excess inclusions") generally may not be offset
by such a holder's net operating loss carryovers
or other deductions, and in the case of a tax-
exempt holder of a REMIC Residual Certificate will
be treated as "unrelated business taxable income".
In certain situations, particularly in the early
years of a REMIC, holders of a REMIC Residual
Certificate may have taxable income, and possibly
tax liabilities with respect to such income, in
excess of cash distributed to them. "DISQUALIFIED
ORGANIZATIONS," AS DEFINED IN "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES-REMIC RESIDUAL
CERTIFICATES-TAX ON DISPOSITION OF REMIC RESIDUAL
CERTIFICATES; RESTRICTION ON TRANSFER; HOLDING BY
PASS-THROUGH ENTITIES," ARE PROHIBITED FROM
ACQUIRING OR HOLDING ANY BENEFICIAL INTEREST IN
THE REMIC RESIDUAL CERTIFICATES. In certain cases,
a transfer of a REMIC Residual Certificate will
not be effective for Federal income tax purposes.
See "Certain Federal
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<PAGE>
Income Tax Consequences-Transfers of REMIC
Residual Certificates" and "-Foreign Investors"
herein.
Grantor Trust. If no election is to be made to
-------------
treat the Trust Fund for a series of Certificates
("Non-REMIC Certificates") as a REMIC, the Trust
Fund will be classified as a grantor trust for
federal income tax purposes and not as an
association taxable as a corporation. Holders of
Non-REMIC Certificates will be treated for such
purposes, subject to the possible application of
the stripped bond rules, as owners of undivided
interests in the related Mortgage Loans and
generally will be required to report as income
their pro rata share of the entire gross income
(including amounts paid as reasonable servicing
compensation) from the Mortgage Loan and will be
entitled, subject to certain limitations, to
deduct their pro rata share of expenses of the
Trust Fund.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income Tax
Consequences" herein and, if applicable, in the
related Prospectus Supplement.
ERISA Considerations....... A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the Code
should carefully review with its legal advisors
whether the purchase, holding or disposition of
Certificates could give rise to a prohibited
transaction under ERISA or the Code or subject the
assets of the Trust Fund to the fiduciary
investment standards of ERISA. See "ERISA
Considerations."
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THE TRUST FUND
A Trust Fund for a Series of Certificates will include the Mortgage
Assets consisting of (A) a Mortgage Pool/*/ comprised of (i) Single Family
Loans, (ii) Multifamily Loans, (iii) Cooperative Loans or (iv) Contracts, (B)
Agency Securities, or (C) Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of
any other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire
beneficial ownership interest in a Trust Fund which will contain a beneficial
ownership interest in another Trust Fund which will contain the Mortgage
Assets. Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Assets of any Trust Fund will consist of Mortgage Loans, Agency
Securities or Private Mortgage-Backed Securities but not a combination
thereof.
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from the Lenders and conveyed by the Seller to the related
Trust Fund. The Lenders may have originated the Mortgage Assets or acquired
the Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program-Underwriting Standards."
The following is a brief description of the Mortgage Assets expected to
be included in the Trust Funds. If specific information respecting the
Mortgage Assets is not known at the time the related Series of Certificates
initially is offered, more general information of the nature described below
will be provided in the Prospectus Supplement, and specific information will
be set forth in a report on Form 8-K to be filed with the Commission within
fifteen days after the initial issuance of such Certificates (the "Detailed
Description"). A copy of the Agreement with respect to each Series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Mortgage Assets relating to
such Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
THE MORTGAGE LOANS-GENERAL
The real property and Manufactured Homes, as the case may be, which
secure repayment of the Mortgage Loans (the "Mortgaged Properties") may be
located in any one of the fifty states or the District of Columbia, Guam,
Puerto Rico or any other territory of the United States. Certain Mortgage
Loans may be conventional loans (i.e., loans that are not insured or
guaranteed by any governmental agency), insured by the FHA or partially
guaranteed by the VA, as specified in the Prospectus Supplement and described
below. Mortgage Loans with certain Loan-to-Value Ratios (as defined herein)
and/or certain principal balances may be covered wholly or partially by
primary mortgage guaranty insurance policies (each, a "Primary Insurance
Policy"). The existence, extent and duration of any such coverage will be
described in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly. Unless otherwise specified in the related Prospectus
Supplement, all of the monthly-pay Mortgage Loans in a Mortgage Pool will have
payments due on the first day of each month. The payment terms of the Mortgage
Loans to be included in a Trust Fund will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
--------------------------
/*/ Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Mortgage Pool and the Certificates
representing certain undivided interests, as described below, in a single
Trust Fund consisting primarily of the Mortgage Loans in such Mortgage
Pool. Similarly, the term "Pass-Through Rate" will refer to the Pass-
Through Rate borne by the Certificates of one specific Series and the term
"Trust Fund" will refer to one specific Trust Fund.
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<PAGE>
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for period of time
or under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be subject
to periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may provide for
the payment of interest at a rate lower than the Mortgage Rate for a period of
time or for the life of the Mortgage Loan, and the amount of any difference
may be contributed from funds supplied by the seller of the Mortgaged Property
or another source or may be treated as accrued interest added to the principal
of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis
of an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the interest rate on the Mortgage Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity ("balloon" payments).
Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
or may change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments. Certain Mortgage
Loans sometimes called graduated payment mortgage loans may require the
monthly payments of principal and interest to increase for a specified
period, provide for deferred payment of a portion of the interest due
monthly during such period, and recoup the deferred interest through
negative amortization whereby the difference between the scheduled
payment of interest and the amount of interest actually accrued is added
monthly to the outstanding principal balance. Other Mortgage Loans
sometimes referred to as growing equity mortgage loans may provide for
periodic scheduled payment increases for a specified period with the full
amount of such increases being applied to principal. Other Mortgage Loans
sometimes referred to as reverse mortgages may provide for monthly
payments to the borrowers with interest and principal payable when the
borrowers move or die. Reverse mortgages typically are made to older
persons who have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified
time periods. The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage Loan in
connection with the sale or certain transfers of the related Mortgaged
Property. Other Mortgage Loans may be assumable by persons meeting the
then applicable underwriting standards of the Lender.
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then specifically known to the
Seller, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Mortgage Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Mortgage Loans
(e.g., one- to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property), (iii) the original
terms to maturity of the Mortgage Loans, (iv) the largest original principal
balance and the smallest original principal balance of any of the Mortgage
Loans, (v) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vi) the aggregate principal balance of Mortgage Loans
having Loan-to-Value Ratios at origination exceeding 80%, (vii) the Mortgage
Rates or APR's or range of Mortgage Rates or APR's borne by the Mortgage
Loans,
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<PAGE>
and (viii) the geographical distribution of the Mortgage Loans on a state-by-
state basis. If specific information respecting the Mortgage Loans is not
known to the Seller at the time the related Certificates are initially
offered, more general information of the nature described above will be
provided in the Prospectus Supplement and specific information will be set
forth in the Detailed Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, the
"Collateral Value" of a Mortgaged Property, other than with respect to
Contracts and certain Mortgage Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Mortgage Loan and (b) the sales price for
such property. Unless otherwise specified in the related Prospectus
Supplement, in the case of Refinance Loans, the Collateral Value of the
related Mortgaged Property is the appraised value thereof determined in an
appraisal obtained at the time of refinancing. Unless otherwise specified in
the related Prospectus Supplement, for purposes of calculating the Loan-to-
Value Ratio of a Contract relating to a new Manufactured Home, the Collateral
Value is no greater than the sum of a fixed percentage of the list price of
the unit actually billed by the manufacturer to the dealer (exclusive of
freight to the dealer site) including "accessories" identified in the invoice
(the "Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. Unless otherwise specified in
the related Prospectus Supplement, the Collateral Value of a used Manufactured
Home is the least of the sales price, appraised value, and National Automobile
Dealer's Association book value plus prepaid taxes and hazard insurance
premiums. The appraised value of a Manufactured Home is based upon the age and
condition of the manufactured housing unit and the quality and condition of
the mobile home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect
the timely payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to any Mortgage Pool. In
the case of Multifamily Loans, such other factors could include excessive
building resulting in an oversupply of rental housing stock or a decrease in
employment reducing the demand for rental units in an area; federal, state or
local regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness to tenants of the Mortgaged Properties. To the extent
that such losses are not covered by credit enhancements, such losses will be
borne, at least in part, by the holders of the Certificates of the related
Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan
Program" and "The Pooling and Servicing Agreement." With respect to Mortgage
Loans serviced by a Master Servicer through a Sub-Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Agreement as if the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Seller with respect to a Series of Certificates will be to
obtain certain representations and warranties from the Lenders or other third
parties and to assign to the Trustee for such Series of Certificates the
Seller's rights with respect to such representations and warranties. See "The
Pooling and Servicing Agreement-Assignment of Mortgage Assets." The
obligations of each Master Servicer with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations under the related
Agreement (including its obligation to enforce the obligations of the Sub-
Servicers, Lenders or other
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<PAGE>
third parties as more fully described herein under "Mortgage Loan Program -
Representations by Lenders; Repurchases" and "The Pooling and Servicing
Agreement-Sub-Servicing by Lenders," "-Assignment of Mortgage Assets") and its
obligation to make certain cash advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans in the amounts described
herein under "Description of the Certificates-Advances." The obligations of a
Master Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, the Single Family Loans may include
loans or participations therein secured by mortgages or deeds of trust on
condominium units in condominium buildings together with such condominium
unit's appurtenant interest in the common elements of the condominium
building. Unless otherwise specified, the Cooperative Loans will be secured by
security interests in or similar liens on stock, shares or membership
certificates issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling
units in such Cooperatives' buildings. Single Family Loans and Cooperative
Loans may be conventional loans (i.e., loans that are not insured or
guaranteed by any governmental agency), insured by the FHA or partially
guaranteed by the VA, as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, Single Family
Loans and Cooperative Loans will all have individual principal balances at
origination of not less than $25,000 and not more than $1,000,000, and
original terms to stated maturity of 15 to 40 years.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units,
individual units in planned unit developments, and certain other dwelling
units. Such Mortgaged Properties may include vacation and second homes,
investment properties and leasehold interests. In the case of leasehold
interests, the term of the leasehold will exceed the scheduled maturity of the
Mortgage Loan by at least five years, unless otherwise specified in the
related Prospectus Supplement. Certain Mortgage Loans may be originated or
acquired in connection with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. Such loans may be conventional loans or FHA-insured loans, as specified
in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, Multifamily Loans will all have original terms
to stated maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include high-
rise, mid-rise and garden apartments. Certain of the Multifamily Loans may be
secured by apartment buildings owned by Cooperatives. The Cooperative owns all
the apartment units in the building and all common areas. The Cooperative is
owned by tenant-stockholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-
stockholder's pro rata share of the Cooperative's payments for its mortgage
loan, real property taxes, maintenance expenses and other capital or ordinary
expenses. Those payments are in addition to any payments of principal and
interest the tenant-stockholder must make on any loans to the tenant-
stockholder secured by its shares in the Cooperative. The Cooperative will be
directly responsible for building management and, in most cases, payment of
real estate taxes and hazard and liability insurance. A Cooperative's ability
to meet debt service obligations on a Multifamily Loan, as well as all other
operating expenses, will be dependent in large part on the receipt of
maintenance payments from the tenant-stockholders, as well as any rental
income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
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CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR.
Unless otherwise specified in the related Prospectus Supplement, Contracts
will all have individual principal balances at origination of not less than
$10,000 and not more than $1,000,000 and original terms to stated maturity of
5 to 40 years.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to
the required utilities, and includes the plumbing, heating, air conditioning,
and electrical systems contained therein; except that such term shall include
any structure which meets all the requirements of [this] paragraph except the
size requirements and with respect to which the manufacturer voluntarily files
a certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust Fund, among other things, the date of
origination of the Contracts; the APRs on the Contracts; the Contract Loan-to-
Value Ratios; the minimum and maximum outstanding principal balances as of the
Cut-off Date and the average outstanding principal balance; the outstanding
principal balances of the Contracts included in the related Trust Fund; and
the original maturities of the Contracts and the last maturity date of any
Contract.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned
corporate instrumentality of the United States with the United States
Department of Housing and Urban Development. Section 306(g) of Title II of the
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA
to guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured
by FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA
Loans"), or partially guaranteed by the VA under the Servicemen's Readjustment
Act of 1944, as amended, or Chapter 37 of Title 38, United States Code ("VA
Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitations as to amount, to
perform its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may
be issued under either the GNMA I Program or the GNMA II Program) will be a
"fully modified pass-through" mortgaged-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or
VA Loans. The mortgage loans underlying the GNMA Certificates will consist of
FHA Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA
Certificate, even if the payments received by the GNMA Issuer on the FHA Loans
or VA Loans underlying each such GNMA Certificate are less than the amounts
due on each such GNMA Certificate.
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The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities
of substantially less than 30 years). Each such GNMA Certificate will be based
on and backed by a pool of FHA Loans or VA Loans secured by one- to four-
family residential properties or manufactured homes and will provide for the
payment by or on behalf of the GNMA Issuer to the registered holder of such
GNMA Certificate of scheduled monthly payments of principal and interest equal
to the registered holder's proportionate interest in the aggregate amount of
the monthly principal and interest payment on each FHA Loan or VA Loan
underlying such GNMA Certificate, less the applicable servicing and guarantee
fee which together equal the difference between the interest on the FHA Loan
or VA Loan and the pass-through rate on the GNMA Certificate. In addition,
each payment will include proportionate pass-through payments of any
prepayments of principal on the FHA Loans or VA Loans underlying such GNMA
Certificate and liquidation proceeds in the event of a foreclosure or other
disposition of any such FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as
it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly
to the registered holder of such GNMA Certificate. In the event no payment is
made by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to
make such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA
I Certificate will equal the interest rate on the mortgage loans included in
the pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans
secured by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which
the scheduled monthly installments on such GNMA Certificate is due. Such
regular monthly installments on each such GNMA Certificate are required to be
paid to the Trustee as registered holder by the 15th day of each month in the
case of a GNMA I Certificate and are required to be mailed to the Trustee by
the 20th day of each month in the case of a GNMA II Certificate. Any principal
prepayments on any FHA Loans or VA Loans underlying a GNMA Certificate held in
a Trust Fund or any other early recovery of principal on such loan will be
passed through to the Trustee as the registered holder of such GNMA
Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that,
during the early years of such mortgage loans, will be less than the amount of
stated interest on such mortgage loans. The interest not so paid will be added
to the principal of such graduated payment mortgage loans and, together with
interest thereon, will be paid in subsequent years. The obligations of GNMA
and of a GNMA Issuer will be the same irrespective of whether the GNMA
Certificates are backed by graduated payment mortgage loans or Buydown Loans.
No statistics comparable to the FHA's prepayment experience on level payment,
non-buydown loans
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are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry
form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed
by multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
The GNMA Certificates included in a Trust fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby
expanding the total amount of funds available for housing. Operating
nationwide, FNMA helps to redistribute mortgage funds from capital-surplus to
capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either
provided by FNMA from its own portfolio or purchased pursuant to the criteria
of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate is equal to the lowest interest rate
of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under
a regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on
the mortgage loans underlying a FNMA Certificate will be between 50 basis
points and 250 basis points greater than in its annual pass-through rate and
under a special servicing option (pursuant to which FNMA assumes the entire
risk for foreclosure losses), the annual interest rates on the mortgage loans
underlying a FNMA Certificate will generally be between 55 basis points and
255 basis points greater than the annual FNMA Certificate pass-through rate.
If specified in the Prospectus Supplement, FNMA Certificates may be backed by
adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans,
whether or not received, and such holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations of
FNMA under its guarantees are obligations solely of FNMA and are not backed
by, nor entitled to, the full faith and credit of the United States. Although
the Secretary of the Treasury of the United States has discretionary authority
to lend FNMA up to $2.25 billion outstanding at any time, neither the United
States nor any agency thereof is obligated to finance FNMA's operations or to
assist FNMA in any other manner. If FNMA were unable to satisfy its
obligations, distributions to holders of FNMA Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly
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distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed
on or after May 1, 1985 (other than FNMA Certificates backed by pools
containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each FNMA Certificate will be made by FNMA on the
25th day of each month to the persons in whose name the FNMA Certificate is
entered in the books of the Federal Reserve Banks (or registered on the FNMA
Certificate register in the case of fully registered FNMA Certificates) as of
the close of business on the last day of the preceding month. With respect to
FNMA Certificates issued in book-entry form, distributions thereon will be
made by wire, and with respect to fully registered FNMA Certificates,
distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home
Loan Mortgage Corporation Act, Title III of the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the
Federal Home Loan Banks. FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of the purchase of first lien conventional mortgage loans
or participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC
Certificates are sold under the terms of a Mortgage Participation Certificate
Agreement. A FHLMC Certificate may be issued under either FHLMC's Cash Program
or Guarantor Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of
mortgage loans with original terms to maturity of between 10 and 30 years.
Each such mortgage loan must meet the applicable standards set forth in the
FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program, any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of
the applicable Certificate rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such
holder's pro rata share thereof, but does not, except if and to the extent
specified in the Prospectus Supplement for a Series of Certificates, guarantee
the timely payment of scheduled principal. Under FHLMC's Gold PC Program,
FHLMC guarantees the timely payment of principal based on the difference
between the pool factor, published in the month preceding the month of
distribution and the pool factor published in such month of distribution.
Pursuant to its guarantees, FHLMC indemnifies holders of FHLMC Certificates
against any diminution in principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account of its
guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than (i) 30 days following foreclosure
sale, (ii) 30 days following payment of the claim by any mortgage insurer, or
(iii) 30 days
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following the expiration of any right of redemption, whichever occurs later,
but in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding
the collection of principal after default on the mortgage loans underlying
FHLMC Certificates, including the timing of demand for acceleration, FHLMC
reserves the right to exercise its judgment with respect to the mortgage loans
in the same manner as for mortgage loans which it has purchased but not sold.
The length of time necessary for FHLMC to determine that a mortgage loan
should be accelerated varies with the particular circumstances of each
mortgagor, and FHLMC has not adopted standards which require that the demand
be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by, nor
entitled to, the full faith and credit of the United States. If FHLMC were
unable to satisfy such obligations, distributions to holders of FHLMC
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders
of FHLMC Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on
the underlying mortgage loans, interest at the FHLMC pass-through rate and any
other sums such as prepayment fees, within 60 days of the date on which such
payments are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans
underlying a FHLMC Certificate may exceed the pass-through rate on the FHLMC
Certificate by 50 to 100 basis points. Under such program, FHLMC purchases
groups of whole mortgage loans from sellers at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which
when applied to the interest rate of the mortgage loans and participations
purchased, results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate
is established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day
of the second month following the month in which the purchaser became a
registered holder of the FHLMC Certificates. Thereafter, such remittance will
be distributed monthly to the registered holder so as to be received normally
by the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or
after January 2, 1985, and makes payments of principal and interest each month
to the registered holders thereof in accordance with such holders'
instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain FHLMC,
FNMA, GNMA or other government agency or government-sponsored agency
Certificates. The underlying securities will be held under a trust agreement
by FHLMC, FNMA, GNMA or another government agency or government-sponsored
agency, each as
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trustee, or by another trustee named in the related Prospectus Supplement.
FHLMC, FNMA, GNMA or another government agency or government-sponsored agency
will guarantee each stripped Agency Security to the same extent as such entity
guarantees the underlying securities backing such stripped Agency Security,
unless otherwise specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage pass-
through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held
in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of
Mortgage Loans, or (b) collateralized mortgage obligations secured by Mortgage
Loans. Private Mortgage-Backed Securities will have been issued pursuant to a
PMBS agreement (the "PMBS Agreement"). The seller/servicer of the underlying
Mortgage Loans will have entered into the PMBS Agreement with the PMBS Trustee
under the PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will
possess the Mortgage Loans underlying such Private Mortgage-Backed Security.
Mortgage Loans underlying a Private Mortgage-Backed Security will be serviced
by the PMBS Servicer directly or by one or more sub-servicers who may be
subject to the supervision of the PMBS Servicer. Unless otherwise described in
the Prospectus Supplement, the PMBS Servicer will be a FNMA or FHLMC approved
servicer and, if FHA Loans underlie the Private Mortgage-Backed Securities,
approved by the Department of Housing and Urban Development ("HUD") as an FHA
mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the
purpose of among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts.
If so specified in the Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Seller. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the
Mortgage Loans underlying the Private Mortgage-Backed Securities may be
guaranteed by an agency or instrumentality of the United States, the Private
Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-
Backed Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or
the PMBS Servicer may have the right to repurchase assets underlying the
Private Mortgage-Backed Securities after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private Mortgage-
Backed Securities may consist of fixed rate, level payment, fully amortizing
loans or graduated payment mortgage loans, buydown loans, adjustable rate
mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property, multifamily
property, Manufactured Homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and
the related shares issued by such Cooperative. Except as otherwise specified
in the related Prospectus Supplement, (i) no Mortgage Loan will have had a
Loan-to-Value Ratio at origination in excess of 95%, (ii) each Single Family
Loan secured by a Mortgaged Property having a Loan-to-Value Ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy
until the principal balance is reduced to 80%, (iii) each Mortgage Loan will
have had an original term to stated maturity of not less than 5 years and not
more than 40 years, (iv) no Mortgage Loan that was more than 30 days
delinquent more
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than once in the past 12 months and will not be delinquent as of the Cut-off
Date as to the payment of principal or interest will have been eligible for
inclusion in the assets under the related PMBS Agreement, (v) each Mortgage
Loan (other than a Cooperative Loan) will be required to be covered by a
standard hazard insurance policy (which may be a blanket policy), and (vi)
each Mortgage Loan (other than a Cooperative Loan or a Contract secured by a
Manufactured Home) will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying
the Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Mortgage-
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans which comprise the underlying assets for
the Private Mortgage-Backed Securities including to the extent available (A)
the payment features of such Mortgage Loans, (B) the approximate aggregate
principal balance, if known, of underlying Mortgage Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of
servicing fees with respect to the Mortgage Loans, and (D) the minimum and
maximum stated maturities of the underlying Mortgage Loans at origination,
(iii) the maximum original term-to-stated maturity of the Private Mortgage-
Backed Securities, (iv) the weighted average term-to-stated maturity of the
Private Mortgage-Backed Securities, (v) the pass-through or certificate rate
of the Private Mortgage-Backed Securities, (vi) the weighted average pass-
through or certificate rate of the Private Mortgage-Backed Securities, (vii)
the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the Mortgage Loans
underlying the Private Mortgage-Backed Securities or to such Private Mortgage-
Backed Securities themselves, (ix) the terms on which the underlying Mortgage
Loans for such Private Mortgage-Backed Securities may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the Private
Mortgage-Backed Securities and (x) the terms on which Mortgage Loans may be
substituted for those originally underlying the Private Mortgage-Backed
Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee
to be incomplete. The period during which such substitution will be permitted
generally will be indicated in the related Prospectus Supplement. The related
Prospectus Supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the Trust
Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the sale
of the Certificates of each Series to repay short-term loans incurred to
finance the purchase of the Mortgage Assets related to such Certificates, to
acquire certain of the Mortgage Assets to be deposited in the related trust
Fund, and/or to pay other expenses connected with pooling Mortgage Assets and
issuing Certificates. Any amounts remaining after such payments may be used
for general corporate purposes. The Seller expects to sell Certificates in
Series from time to time.
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THE SELLER
Bear Stearns Mortgage Securities Inc., the Seller, is a Delaware
corporation organized on October 17, 1991 for the purpose of acquiring
Mortgage Assets and selling interests therein or bonds secured thereby. It is
a wholly owned subsidiary of Bear Stearns Mortgage Capital Corporation, a
Delaware corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller
maintains its principal office at 245 Park Avenue, New York, New York 10167.
Its telephone number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Seller, either
directly or through affiliates, from Lenders. Unless otherwise specified in
the related Prospectus Supplement, the Mortgage Loans so acquired by the
Seller will have been originated in accordance with the underwriting criteria
specified below under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will represent and warrant that all Mortgage Loans originated and/or
sold by it to the Seller or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage
lenders or manufactured home lenders generally during the period of
origination. As to any Mortgage Loan insured by the FHA or partially
guaranteed by the VA, the Lender will represent that it has complied with
underwriting policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Mortgaged Property as collateral. In general, a
prospective borrower applying for a Single Family Loan or a Cooperative Loan
or for financing secured by a Manufactured Home is required to fill out a
detailed application designed to provide to the underwriting officer pertinent
credit information. As part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports the
length of employment with that organization, the current salary, and whether
it is expected that the borrower will continue such employment in the future.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts. Underwriting standards which pertain
to the creditworthiness of borrowers seeking Multifamily Loans will be
described in the related Prospectus Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the
cost of replacing the home. With respect to Cooperative Loans, the appraisal
is based on the market value of comparable units. With respect to Contracts,
the appraisal is based on recent sales of comparable Manufactured Homes and,
when deemed applicable, a replacement cost analysis based on the cost of a
comparable Manufactured Home. With respect to a Multifamily Loan, the
appraisal must specify whether an income analysis, a market analysis or a cost
analysis, was used. An appraisal employing the income approach to value
analyzes a multifamily project's cashflow, expenses, capitalization and other
operational information in determining the property's value. The market
approach to value focuses its analysis on the prices paid for the purchase of
similar properties in the multifamily project's area, with adjustments made
for variations between these other properties and the multifamily project
being appraised. The cost approach calls for the appraiser to make an estimate
of land value and then determine the current cost of reproducing
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the building less any accrued depreciation. In any case, the value of the
property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the
outstanding loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts, once
all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The underwriting standards applied by Lenders may be varied
in appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a leasehold
interest in a real property, the title to which is held by a third party
lessor, the Lender will represent and warrant, among other things, that the
remaining term of the lease and any sublease is at least five years longer
than the remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such
Mortgage Loans may provide for escalating or variable payments by the
mortgagor or obligor. These types of Mortgage Loans are underwritten on the
basis of a judgment that mortgagors or obligors will have the ability to make
monthly payments required initially. In some instances, however, a mortgagor's
or obligor's income may not be sufficient to permit continued loan payments as
such payments increase.
QUALIFICATIONS OF LENDERS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will be required to satisfy the qualifications set forth herein. Each
Lender must be an institution experienced in originating and servicing
Mortgage Loans of the type contained in the related Mortgage Pool in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate and service those Mortgage Loans. Unless
otherwise specified in the Prospectus Supplement, each Lender must be a
seller/servicer approved by either FNMA or FHLMC, and each Lender must be a
mortgagee approved by the HUD or an institution the deposit accounts in which
are insured by the Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or
Agreement, each Lender will have made representations and warranties in
respect of the Mortgage Loans sold by such Lender and evidenced by a Series of
Certificates. Such representations and warranties generally include, among
other things: (i) that title insurance (or in the case of Mortgaged Properties
located in areas where such policies are generally not available, an
attorney's certificate of title) in the case of Single Family Loans and
Multifamily Loans and any required hazard insurance policy was in effect on
the date of purchase of the Mortgage Loan from the Lender by or on behalf of
the Seller; (ii) that the Lender had title to each such Mortgage Loan and such
Mortgage Loan was subject to no offsets, defenses or counterclaims; (iii) that
each Mortgage Loan constituted a valid first lien on, or a perfected security
interest with respect to, the Mortgaged Property (subject only to permissible
title insurance exceptions, if applicable, and certain other exceptions
described in the Agreement) and that the Mortgaged Property was free from
damage and was in good repair; (iv) that there were no delinquent tax or
assessment liens against the Mortgaged Property, (v) that no required payment
on a Mortgage Loan
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was more than thirty days delinquent; and (vi) that each Mortgage Loan was
made in compliance with, and is enforceable under, all applicable state and
federal laws and regulations in all material respects.
Unless otherwise specified in the related Prospectus Supplement, all of
the representations and warranties of a Lender in respect of a Mortgage Loan
will have been made as of the date on which such Lender sold the Mortgage Loan
to the Seller or one of its affiliates. A substantial period of time may have
elapsed between such date and the date of initial issuance of the Series of
Certificates evidencing an interest in such Mortgage Loan. Since the
representations and warranties of a Lender do not address events that may
occur following the sale of a Mortgage Loan by such Lender, its repurchase
obligation described below will not arise if the relevant event that would
otherwise have given rise to such an obligation with respect to a Mortgage
Loan occurs after the date of sale of such Mortgage Loan by such Lender to the
Seller or its affiliates. If the Master Servicer is also a Lender with respect
to a particular Series, such representations will be in addition to the
representations and warranties, if any, made by the Master Servicer in its
capacity as a Master Servicer.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or the Trustee, if the Master Servicer is the Lender, will
promptly notify the relevant Lender of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and
adversely affects the interests of the Certificateholders in such Mortgage
Loan. Unless otherwise specified in the related Prospectus Supplement, if such
Lender cannot cure such breach within 60 days after notice from the Master
Servicer or the Trustee, as the case may be, then such Lender will be
obligated to repurchase such Mortgage Loan from the Trust Fund at a price (the
"Purchase Price") equal to the unpaid principal balance thereof as of the date
of the repurchase plus accrued interest thereon to the first day of the month
following the month of repurchase at the Mortgage Rate (less any amount
payable as related servicing compensation if the Lender is the Master
Servicer) or such other price as may be described in the related Prospectus
Supplement. Except in those cases in which the Master Servicer is the Lender,
the Master Servicer will be required under the applicable Agreement to enforce
this obligation for the benefit of the Trustee and the holders of the
Certificates, following the practices it would employ in its good faith
business judgment were it the owner of such Mortgage Loan. This repurchase
obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by a Lender.
Certain rights of substitution for defective Mortgage Loans may be provided
with respect to a Series in the related Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer is
the Lender) will be obligated to purchase a Mortgage Loan if a Lender defaults
on its obligation to do so, and no assurance can be given that Lenders will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty
of a Lender may also constitute a breach of a representation made by the
Master Servicer, the Master Servicer may have a repurchase obligation as
described below under "The Pooling and Servicing Agreement-Assignment of
Mortgage Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Certificateholders. In such cases, the third party
will be obligated to purchase a Mortgage Loan upon a breach of such
representations and warranties, and the Lender will not be obligated to
purchase a Mortgage Loan if the third party defaults on its obligation to do
so.
The Lender and any third party which conveyed the Mortgage Loans to the
Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the
Mortgage Loans. Any arrangements for the assignment of representations and the
repurchase of Mortgage Loans must be acceptable to the Rating Agency rating
the related Certificates.
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OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer
may, at its option, purchase from the Trust Fund any Mortgage Loan which is
delinquent in payment by 91 days or more. Any such purchase shall be at such
price as may be described in the related Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement,
dated as of the related Cut-off Date, among the Seller, one or more Master
Servicers and the Trustee for the benefit of the holders of the Certificates
of such Series. The provisions of each Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the
related Trust Fund. A form of an Agreement is an exhibit to the Registration
Statement of which this Prospectus is a part. The following summaries describe
certain provisions which may appear in each Agreement. The Prospectus
Supplement for a Series of Certificates will describe any provision of the
Agreement relating to such Series that materially differs from the description
thereof contained in this Prospectus. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement for each Series of Certificates and
the applicable Prospectus Supplement. The Seller will provide a copy of the
Agreement (without exhibits) relating to any Series without charge upon
written request of a holder of a Certificate of such Series addressed to Bear
Stearns Mortgage Securities Inc., 245 Park Avenue, New York, New York 10167.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in fully registered form only, in the
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the Mortgage Assets included in any other Trust Fund established by the
Seller. The Certificates will not represent obligations of the Seller or any
affiliate of the Seller. The Mortgage Loans will not be insured or guaranteed
by any governmental entity or other person, unless otherwise specified in the
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the Prospectus
Supplement ("Retained Interest")), (ii) such assets as from time to time are
required to be deposited in the related Protected Account, Certificate Account
or any other accounts established pursuant to the Agreement (collectively, the
"Accounts"); (iii) property which secured a Mortgage Loan and which is
acquired on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure and (iv) any Primary Insurance Policies, FHA insurance (the "FHA
Insurance"), VA guarantees (the "VA Guarantees"), other insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may include one or more of the following: reinvestment income on payments
received on the Mortgage Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a financial guaranty insurance policy, third party
guarantees or similar instruments or other agreements. If provided in the
related Agreement, a certificate administrator may be obligated to perform
certain duties in connection with the administration of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that receive certain preferential
treatment with respect to one or more other classes of Certificates of such
Series. Certain Series or classes of Certificates may he covered by insurance
policies or other forms of credit enhancement, in each case as described
herein and in the related Prospectus Supplement. Distributions on one or more
classes of a Series of Certificates may be made prior to one or more other
classes, after the occurrence of specified events, in accordance with a
schedule or formula, on the basis of collections from designated portions of
the Mortgage Assets in the related Trust Fund or on a different basis, in each
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case, as specified in the related Prospectus Supplement. The timing and
amounts of such distributions may vary among classes or over time as specified
in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Certificates will be made by the Trustee
on each Distribution Date (i.e, monthly, quarterly, semi-annually or at such
other intervals and on the dates as are specified in the Prospectus
Supplement) in proportion to the percentages specified in the related
Prospectus Supplement. Distributions will be made to the persons in whose
names the Certificates are registered at the close of business on the dates
specified in the Prospectus Supplement (each, a "Record Date"). Distributions
will be made by check or money order mailed to the persons entitled thereto at
the address appearing in the register maintained for holders of Certificates
(the "Certificate Register") or, if specified in the related Prospectus
Supplement, in the case of Certificates that are of a certain minimum
denomination, upon written request by the Certificateholder, by wire transfer
or by such other means as are described therein; provided, however, that the
final distribution in retirement of the Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee or other person specified in the notice to Certificateholders of such
final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of
a sum sufficient to cover any related tax or other governmental charge.
DISTRIBUTIONS ON CERTIFICATES
General. In general, the method of determining the amount of
distributions on a particular Series of Certificates will depend on the type
of credit support, if any, that is used with respect to such Series. See
"Credit Enhancement." Set forth below are descriptions of various methods that
may be used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any Reserve
Account and funds received as a result of credit enhancement. As between
Certificates of different classes and as between distributions of interest and
principal and, if applicable, between distributions of prepayments of
principal and scheduled payments of principal, distributions made on any
Distribution Date will be applied as specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, distributions to any
class of Certificates will be made pro rata to all Certificateholders of that
class.
Available Funds. All distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement
and specified in the Agreement. Unless otherwise provided in the related
Prospectus Supplement, "Available Funds" for each Distribution Date will equal
the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust Fund
received by the Master Servicer after the Cut-off Date and on or prior to
the day of the month of the related Distribution Date specified in the
Prospectus Supplement (the "Determination Date") except:
(a) all payments which were due on or before the Cut-off Date;
(b) all Liquidation Proceeds, all Insurance Proceeds, all
Principal Prepayments (each defined herein) and all proceeds of any
Mortgage Loan purchased by a Lender or any other entity pursuant to
the Agreement that were received after the prepayment period
specified in the Prospectus
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Supplement and all related payments of interest representing
interest for any period after such prepayment period;
(c) all scheduled payments of principal and interest due on a
date or dates subsequent to the first day of the month of
distribution;
(d) amounts received on particular Mortgage Loans as late
payments of principal or interest or other amounts required to be
paid by the mortgagors (the "Mortgagors"), but only to the extent of
any unreimbursed advance in respect thereof made by the Master
Servicer (including the related Sub-Servicers);
(e) amounts representing reimbursement, to the extent permitted
by the Agreement and as described under "Advances" below, for
advances made by the Master Servicer and advances made by Sub-
Servicers that were deposited into the Certificate Account, and
amounts representing reimbursement for certain other losses and
expenses incurred by the Master Servicer or the Seller and described
below or in the related Agreement; and
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust Fund which represents servicing
compensation payable to the Master Servicer or Retained Interest
which is to be retained from such collection or is permitted to be
retained from related Insurance Proceeds, Liquidation Proceeds or
proceeds of Mortgage Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer
(including Sub-Servicers) as described under "Advances" below and
deposited by it in the Certificate Account; and
(iii) if applicable, amounts withdrawn from a Reserve Account or
received in connection with other credit support.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Current Principal Amount
(defined herein) (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate notional principal balance)
of each class of Certificates entitled to interest from the date, at the Pass-
Through Rate and for the periods specified in the Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Certificates entitled to interest (other
than a class of Certificates that provides for interest that accrues, but is
not currently payable, referred to hereafter as "Accrual Certificates") will
be distributable on the Distribution Dates specified in the Prospectus
Supplement until the aggregate Current Principal Amount of the Certificates of
such class has been distributed in full or, in the case of Certificates
entitled only to distributions allocable to interest, until the aggregate
notional principal balance of such Certificates is reduced to zero or for the
period of time designated in the Prospectus Supplement. The original Current
Principal Amount of each Certificate will equal the aggregate distributions
allocable to principal to which such Certificate is entitled. Unless otherwise
specified in the Prospectus Supplement, distributions allocable to interest on
each Certificate that is not entitled to distributions allocable to principal
will be calculated based on the notional principal balance of such
Certificate. The notional principal balance of a Certificate will not evidence
an interest in or entitlement to distributions allocable to principal but will
be used solely for convenience in expressing the calculation of interest and
for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a
given Distribution Date will be added to the aggregate Current Principal
Amount of such class of Certificates on that Distribution Date. Unless
otherwise specified in the Prospectus Supplement, distributions of interest on
each class of Accrual Certificates will commence only after the occurrence of
the events specified in the Prospectus Supplement. Unless otherwise specified
in the Prospectus Supplement, prior to such time, the beneficial ownership
interest of such class of Accrual Certificates in the Trust Fund, as reflected
in the aggregate Current Principal Amount of such class of Accrual
Certificates, will increase on each Distribution Date by the amount
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of interest that accrued on such class of Accrual Certificates during the
preceding interest accrual period but that was not required to be distributed
to such class on such Distribution Date. Any such class of Accrual
Certificates will thereafter accrue interest on its outstanding Current
Principal Amount as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate "Current Principal Amount" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Current Principal Amount of such class of Certificates specified in
the Prospectus Supplement, reduced by all distributions and losses reported to
the holders of such Certificates as allocable to principal, and, in the case
of Accrual Certificates, unless otherwise specified in the Prospectus
Supplement, increased by all interest accrued but not then distributable on
such Accrual Certificates. The Prospectus Supplement will specify the method
by which the amount of principal to be distributed on the Certificates on each
Distribution Date will be calculated and the manner in which such amount will
be allocated among the classes of Certificates entitled to distributions of
principal.
If so provided in the Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in the Prospectus Supplement. Any such allocation of
Principal Prepayments to such class or classes of Certificateholders will have
the effect of accelerating the amortization of such Senior Certificates while
increasing the interests evidenced by the Subordinated Certificates in the
Trust Fund. Increasing the interests of the Subordinated Certificates relative
to that of the Senior Certificates is intended to preserve the availability of
the subordination provided by the Subordinated Certificates. See "Credit
Enhancement-Subordination."
Unscheduled Distributions. If specified in the Prospectus Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner
described below and in the Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the Prospectus Supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Mortgage Assets, low
rates then available for reinvestment of such payments or both, the Trustee or
the Master Servicer determines, based on the assumptions specified in the
Agreement, that the amount anticipated to be on deposit in the Certificate
Account on the next Distribution Date, together with, if applicable, any
amounts available to be withdrawn from any Reserve Account, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. Unless otherwise specified in the Prospectus Supplement,
the amount of any such unscheduled distribution that is allocable to principal
will not exceed the amount that would otherwise have been required to be
distributed as principal on the Certificates on the next Distribution Date.
Unless otherwise specified in the Prospectus Supplement, all unscheduled
distributions will include interest at the applicable Pass-Through Rate (if
any) on the amount of the unscheduled distribution allocable to principal for
the period and to the date specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution
Date (from its own funds, funds advanced by Sub-Servicers or funds held in any
of the Accounts for future distributions to the holders of such Certificates),
an amount equal to the aggregate of payments of principal and interest that
were delinquent on the related Determination Date and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such
advances will be recoverable out of late payments by Mortgagors, Liquidation
Proceeds, Insurance Proceeds or otherwise with respect to the specific
Mortgage Loan or, if required by the applicable Rating Agency, with respect to
any of the Mortgage Loans.
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In making advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If advances
are made by the Master Servicer from cash being held for future distribution
to Certificateholders, the Master Servicer will replace such funds on or
before any future Distribution Date to the extent that funds in the applicable
Account on such Distribution Date would be less than the amount required to be
available for distributions to Certificateholders on such date. Any Master
Servicer funds advanced will be reimbursable to the Master Servicer out of
recoveries on the specific Mortgage Loans with respect to which such advances
were made (e.g., late payments made by the related Mortgagor, any related
Insurance Proceeds, Liquidation Proceeds or proceeds of any Mortgage Loan
purchased by a Lender under the circumstances described hereinabove). Advances
by the Master Servicer (and any advances by a Sub-Servicer) also will be
reimbursable to the Master Servicer (or Sub-Servicer) from cash otherwise
distributable to Certificateholders (including the holders of Senior
Certificates) at such time as the Master Servicer determines that any such
advances previously made are not ultimately recoverable from the proceeds with
respect to the specific Mortgage Loan or, if required by the applicable Rating
Agency, at such time as a loss is realized with respect to a specific Mortgage
Loan. The Master Servicer also will be obligated to make advances, to the
extent recoverable out of Insurance Proceeds, Liquidation Proceeds or
otherwise, in respect of certain taxes and insurance premiums not paid by
Mortgagors on a timely basis. Funds so advanced are reimbursable to the Master
Servicer to the extent permitted by the Agreement. If specified in the related
Prospectus Supplement, the obligations of the Master Servicer to make advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
and except as otherwise set forth in an applicable Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Certificateholder of record of the related Series a statement setting forth,
to the extent applicable or material to such Series of Certificates, among
other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and if so specified in the related Prospectus Supplement, prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any advance by the Master Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Certificateholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the amounts
distributed to the Senior Certificateholders;
(v) the outstanding Current Principal Amount or notional principal
balance of such class after giving effect to the distribution of
principal on such Distribution Date;
(vi) if applicable, the percentage of principal payments on the
Mortgage Loans, if any, which such class will be entitled to receive on
the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate, the Pass-Through
Rate applicable to the distribution on the Distribution Date;
(viii) the number and aggregate principal balances of Mortgage Loans
in the related Mortgage Pool delinquent (a) one month and (b) two or more
months;
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(ix) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure, and if such real estate
secured a Multifamily Loan, such additional information as may be
specified in the related Prospectus Supplement; and
(x) if applicable, the amount remaining in any Reserve Account or
the amount remaining of any other credit support, after giving effect to
the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having a denomination or
interest specified in the related Prospectus Supplement or the report to
Certificateholders. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature
to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year and (b) such other customary information as may be deemed
necessary or desirable for Certificateholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates
registered in the name of Cede & Co. ("Cede"), the nominee for The Depository
Trust Company ("DTC"). DTC is a limited purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code ("UCC") and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was
created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
their accounts, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the
Certificates from the Trustee through DTC and its Participants. Under a book-
entry format, Certificateholders will receive payments after the related
Distribution Date because, while payments are required to be forwarded to
Cede, as nominee for DTC, on each such date, DTC will forward such payments to
its Participants which thereafter will be required to forward them to Indirect
Participants or Certificateholders. Under a book-entry format, it is
anticipated that the only Certificateholder will be Cede, as nominee of DTC,
and that the beneficial holders of Certificates will not be recognized by the
Trustee as Certificateholders under the Agreement. The beneficial holders of
such Certificates will only be permitted to exercise the rights of
Certificateholders under the Agreement indirectly through DTC and its
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Certificates and is
required to receive and transmit payments of principal of and interest of the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly
are required to make book-entry transfers and receive and transmit such
payments on behalf of their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the
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DTC system, or otherwise take actions in respect of such Certificates may be
limited due to the lack of a physical certificate for such Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with
respect to specified percentages of the Certificateholders only at the
direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Certificates that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Certificates to the extent that such actions
are taken on behalf of Participants whose holdings include such current
principal amounts of outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to
Certificateholders or their nominees ("Definitive Certificates"), rather than
to DTC or its nominee only under the events specified in the related
Agreement. Such events may include the following: (i) the Seller advises the
Trustee in writing that DTC is no longer willing or able to properly discharge
its responsibilities as Depository with respect to the Certificates, and the
Trustee or the Seller is unable to locate a qualified successor, (ii) the
Seller, at its option, elects to terminate the book-entry system through DTC,
or (iii) after the occurrence of an Event of Default (defined herein),
Certificateholders representing not less than 50% of the aggregate Current
Principal Amount of the Certificates advise the Trustee and DTC through
Participants in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the best interest of the
Certificateholders. Upon the occurrence of any of the events specified in the
related Agreement, DTC will be required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the certificates representing the Certificates and instruction for re-
registration, the Trustee will issue the Certificates in the form of
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders. Thereafter, payments of
principal of and interest on the Certificates will be made by the Trustee
directly to Certificateholders in accordance with the procedures set forth
herein and in the Agreement. The final distribution of any Certificate
(whether Definitive Certificates or Certificates registered in the name of
Cede), however, will be made only upon presentation and surrender of such
Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of
a Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of (i) the subordination of
one or more classes of the Certificates of such Series, (ii) the use of a Pool
Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond, FHA
Insurance, VA Guarantees, Reserve Accounts, a letter of credit, a limited
financial guaranty insurance policy, other third party guarantees, interest
rate or other swap agreements, caps, collars or floors, another method of
credit enhancement described in the related Prospectus Supplement, or the use
of a cross-support feature, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, holders of one or more
classes of Certificates will bear their allocable share of deficiencies. If a
form of credit enhancement applies to several classes of Certificates, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Unless otherwise
specified in the Prospectus Supplement, coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Seller if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates.
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SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination
thereof that otherwise would have been payable to one or more classes of
Subordinated Certificates of a Series will instead be payable to holders of
one or more classes of Senior Certificates under the circumstances and to the
extent specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Loans and
losses on defaulted Mortgage Loans will be borne first by the various classes
of Subordinated Certificates and thereafter by the various classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Loans over the
lives of the Certificates or at any time, the aggregate losses in respect of
defaulted Mortgage Loans which must be borne by the Subordinated Certificates
by virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Certificateholders that will be
distributable to Senior Certificateholders on any Distribution Date may be
limited as specified in the Prospectus Supplement. If aggregate distributions
in respect of delinquent payments on the Mortgage Loans or aggregate losses in
respect of such Mortgage Loans were to exceed the total amounts payable and
available for distribution to holders of Subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, holders of Senior
Certificates would experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable
to holders of Subordinated Certificates on any Distribution Date may instead
be deposited into one or more Reserve Accounts established with the Trustee.
If so specified in the Prospectus Supplement, such deposits may be made on
each Distribution Date, on each Distribution Date for specified periods or
until the balance in the Reserve Account has reached a specified amount and,
following payments from the Reserve Account to holders of Senior Certificates
or otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the
Prospectus Supplement. If so specified in the Prospectus Supplement, amounts
on deposit in the Reserve Account may be released to the holders of the class
of Certificates specified in the Prospectus Supplement at the times and under
the circumstances specified in the Prospectus Supplement.
If so specified in the Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other classes
of Senior and Subordinated Certificates, respectively, through a cross support
mechanism or otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool of
Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy
will be obtained for the Mortgage Pool and issued by the insurer (the "Pool
Insurer") named in such Prospectus Supplement. Each Pool Insurance Policy
will, subject to the limitations described below, cover loss by reason of
default in payment on Single Family Loans or Cooperative Loans in the Mortgage
Pool in an amount specified in such Prospectus Supplement. As more fully
described below, the Master Servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the Trustee and the holders of the
Certificates. The Mortgage Pool Insurance Policies, however, are not blanket
policies against loss, since claims thereunder may only be made respecting
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent described below. Unless otherwise specified in the
Prospectus Supplement, a Pool Insurance Policy will not cover losses due to a
failure to pay or denial of a claim under a Primary Insurance Policy.
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Unless otherwise specified in the related Prospectus Supplement, each
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Insurance Policy is in effect for the
defaulted Mortgage Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Mortgaged Property has been kept in force
and real estate taxes and other protection and preservation expenses have been
paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear
of liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance thereof plus
accrued and unpaid interest at the Mortgage Rate to the date of purchase and
certain expenses incurred by the Master Servicer on behalf of the Trustee and
Certificateholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Mortgage Loan plus accrued and unpaid interest at the
Mortgage Rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the Mortgaged
Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Insurance Policy. If any Mortgaged Property
securing a defaulted Mortgage Loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged Mortgaged Property to a
condition sufficient to permit recovery under the Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged Mortgaged Property unless it determines that (i) such restoration will
increase the proceeds to Certificateholders on liquidation of the Mortgage
Loan after reimbursement of the Master Servicer for its expenses and (ii) such
expenses will be recoverable by it through proceeds of the sale of the
Mortgaged Property or proceeds of the related Pool Insurance Policy or any
related Primary Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a
default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the originator or persons involved in the origination thereof,
or (ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus supplement, an
endorsement to the Pool Insurance Policy, a bond or other credit support may
cover fraud in connection with the origination of Mortgage Loans. If so
specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in
a breach of the related Lender's representations described above and, in such
event, might give rise to an obligation on the part of such Lender to purchase
the defaulted Mortgage Loan if the breach cannot be cured by such Lender. No
Pool Insurance Policy will cover (and many Primary Insurance Policies do not
cover) a claim in respect of a defaulted Mortgage Loan occurring when the
servicer of such Mortgage Loan, at the time of default or thereafter, was not
approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Certificates by the aggregate dollar amount of
claims paid less the aggregate of the net dollar amounts realized by the Pool
Insurer upon disposition of all foreclosed properties covered thereby. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date
of payment of the claim. Accordingly, if aggregate net claims paid under any
Pool Insurance Policy reach the original policy limit, coverage under that
Pool Insurance Policy will be exhausted and any further losses will be borne
by the Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
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earthquakes and, to a limited extent, tidal waves and related water damage)
not insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a
flood insurance policy if the Mortgaged Property is located in a federally
designated flood area, and (ii) loss caused by reason of the application of
the coinsurance clause contained in hazard insurance policies. See "The
Pooling and Servicing Agreement-Hazard Insurance". Each Special Hazard
Insurance Policy will not cover losses occasioned by war, civil insurrection,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, flood (if the
Mortgaged Property is located in a federally designated flood area), chemical
contamination and certain other risks. The amount of coverage under any
Special Hazard Insurance Policy will be specified in the related Prospectus
Supplement. Each Special Hazard Insurance Policy will provide that no claim
may be paid unless hazard and, if applicable, flood insurance on the property
securing the Mortgage Loan has been kept in force and other protection and
preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or
flood insurance policy, if any, maintained by the Mortgagor or the Master
Servicer, the Special Hazard Insurer will pay the lesser of (i) the cost of
repair or replacement of such property or (ii) upon transfer of the property
to the Special Hazard Insurer, the unpaid principal balance of such Mortgage
Loan at the time of acquisition of such property by foreclosure or deed in
lieu of foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Master Servicer with respect to such
property. If the unpaid principal balance of a Mortgage Loan plus accrued
interest and certain expenses is paid by the Special Hazard Insurer, the
amount of further coverage under the related Special Hazard Insurance Policy
will be reduced by such amount less any net proceeds from the sale of the
property. Any amount paid as the cost of repair of the property will further
reduce coverage by such amount. So long as a Pool Insurance Policy remains in
effect, the payment by the Special Hazard Insurer of the cost of repair or of
the unpaid principal balance of the related Mortgage Loan plus accrued
interest and certain expenses will not affect the total insurance proceeds
paid to Certificateholders, but will affect the relative amounts of coverage
remaining under the related Special Hazard Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, since
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Pool Insurance Policy in circumstances in which such recoveries
would otherwise be unavailable because property has been damaged by a cause
not insured against by a standard hazard policy and thus would not be
restored, each Agreement will provide that, if the related Pool Insurance
Policy shall have been terminated or been exhausted through payment of claims,
the Master Servicer will be under no further obligation to maintain such
Special Hazard Insurance Policy.
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account in lieu thereof relating to such Certificates may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments
of principal and interest on a Mortgage Loan or a reduction by such court of
the principal amount of a Mortgage Loan and will cover certain unpaid interest
on the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy
Bond will be set forth in the related Prospectus Supplement. To the extent
specified in an applicable Prospectus Supplement, the Master Servicer may
deposit cash, an irrevocable letter of credit
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or any other instrument acceptable to each nationally recognized rating agency
rating the Certificates of the related Series in the Trust Fund to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond.
See "Certain Legal Aspects of the Mortgage Loans-Anti-Deficiency Legislation
and Other Limitations on Lenders."
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account in lieu thereof
relating to such Certificates may be reduced so long as any such reduction
will not result in a downgrading of the rating of such Certificates by any
such rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to
finance the acquisition of one- to four-family housing units and the FHA 245
graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured. Single
Family Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
Single Family Loan relating to a Series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any Sub-
Servicers and are paid to the FHA. The regulations governing FHA single-family
mortgage insurance programs provide that insurance benefits are payable either
upon foreclosure (or other acquisition of possession) and conveyance of the
mortgaged premises to HUD or upon assignment of the defaulted Mortgage Loan to
HUD. With respect to a defaulted FHA-insured Single Family Loan, the Master
Servicer or any Sub-Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Master Servicer or any Sub-
Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to
make an effort to avoid foreclosure by entering, if feasible, into one of a
number of available forms of forbearance plans with the mortgagor. Such plans
may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up
to or beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or
full satisfaction of amounts due under the Mortgage Loan (which payments are
to be repaid by the mortgagor to HUD) or by accepting assignment of the loan
from the Master Servicer or any Sub-Servicer. With certain exceptions, at
least three full monthly installments must be due and unpaid under the
Mortgage Loan, and HUD must have rejected any request for relief from the
mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each FHA-
insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal
to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses
and to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When
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entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance to HUD, the Master Servicer or Sub-
Servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid prior to such date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from
assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Single Family
Loan, bears interest from a date 30 days after the mortgagor's first
uncorrected failure to perform any obligation to make any payment due under
the Mortgage and, upon assignment, from the date of assignment, to the date of
payment of the claim, in each case at the same interest rate as the applicable
HUD debenture interest rate as described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain
instances the spouse of a veteran) to obtain a mortgage loan guarantee by the
VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no
Single Family Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As
of January 1, 1993, the maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on
the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its
option and without regard to the guarantee, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the
VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid
principal amount of the loan, interest accrued on the unpaid balance of the
loan to the appropriate date of computation and limited expenses of the
mortgagee, but in each case only to the extent that such amounts have not been
recovered through liquidation of the Mortgaged Property. The amount payable
under the guarantee may in no event exceed the amount of the original
guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under
Sections 221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer.
Generally the term of such a mortgage loan may be up to 40 years and the ratio
of loan amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are
at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may
be made for up to, in general, a dollar amount per apartment unit established
from time to time by HUD or, at the discretion of the Secretary of HUD, 25% of
the value of the property. In general the loan term may
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not exceed 35 years and a loan to value ratio of no more than 85% is required
for the purchase of a project and 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of
interest from the date of the default.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the Prospectus Supplement will be deposited by
the Master Servicer or Seller on the date specified in the Prospectus
Supplement in one or more Reserve Accounts established with the Trustee. Such
cash and the principal and interest payments on such other instruments will be
used to enhance the likelihood of timely payment of principal of, and interest
on, or, if so specified in the Prospectus Supplement, to provide additional
protection against losses in respect of, the assets in the related Trust Fund,
to pay the expenses of the Trust Fund or for such other purposes specified in
the Prospectus Supplement. Whether or not the Master Servicer or Seller has
any obligation to make such a deposit, certain amounts to which the
Subordinated Certificateholders, if any, will otherwise be entitled may
instead be deposited into the Reserve Account from time to time and in the
amounts as specified in the Prospectus Supplement. Any cash in the Reserve
Account and the proceeds of any other instrument upon maturity will be
invested, to the extent acceptable to the applicable Rating Agency, in
obligations of the United States and certain agencies thereof, certificates of
deposit, certain commercial paper, time deposits and bankers acceptances sold
by eligible commercial banks, certain repurchase agreements of United States
government securities with eligible commercial banks and certain other
instruments acceptable to the applicable Rating Agency ("Permitted
Investments"). Unless otherwise specified in the Prospectus Supplement, any
instrument deposited in the Reserve Account will name the Trustee, in its
capacity as trustee for the holders of the Certificates, as beneficiary and
will be issued by an entity acceptable to the applicable Rating Agency.
Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto letters
of credit, financial guaranty insurance policies, third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, paying
administrative expenses, or accomplishing such other purpose as may be
described in the Prospectus Supplement. The Trust Fund may include a
guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If
any class of Certificates has a floating interest rate, or if any of the
Mortgage Assets has a floating interest rate, the Trust Fund may include an
interest rate swap contract, an interest rate cap agreement or similar
contract providing limited protection against interest rate risks.
CROSS SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
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If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided hereby and of the application of such coverage
to the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Mortgage
Pool will vary depending upon the type of Mortgage Loans included therein.
Each Prospectus Supplement will contain information with respect to the type
and maturities of the Mortgage Loans in the related Mortgage Pool. Unless
otherwise specified in the related Prospectus Supplement, Single Family Loans,
Cooperative Loans and Contracts may be prepaid without penalty in full or in
part at any time. Multifamily Loans may prohibit prepayment for a specified
period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment penalty upon prepayment in full or in
part.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans, Cooperative Loans and Contracts will contain
due-on-sale provisions permitting the mortgagee or holder of the Contract to
accelerate the maturity of the Mortgage Loan or Contract upon sale or certain
transfers by the mortgagor or obligor of the underlying Mortgaged Property. As
described in the related Prospectus Supplement, conventional Multifamily Loans
may contain due-on-sale provisions, due-on-encumbrance provisions, or both.
Mortgage Loans insured by the FHA, and Single Family Loans and Contracts
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on such Mortgage Loans may
be lower than that of conventional Mortgage Loans bearing comparable interest
rates. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further
encumbrance or the proposed conveyance or proposed further encumbrance of the
Mortgaged Property and reasonably believes that it is entitled to do so under
applicable law; provided, however, that the Master Servicer will not take any
enforcement action that would impair or threaten to impair any recovery under
any related insurance policy. See "The Pooling and Servicing Agreement-
Collection Procedures" and "Certain Legal Aspects of the Mortgage Loans" for a
description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative
Loan, the Mortgagor is charged interest on the principal amount of the
Mortgage Loan so prepaid only for the number of days in the month actually
elapsed up to the date of the prepayment rather than for a full month.
Similarly, upon liquidation of a Mortgage Loan, interest accrues on the
principal amount of the Mortgage Loan only for the number of days in the month
actually elapsed up to the date of liquidation rather than for a full month.
Unless otherwise specified in the related Prospectus Supplement, the effect of
prepayments in full and liquidations will be to reduce the amount of interest
passed through in the following month to holders of Certificates because
interest on the principal amount of any Mortgage Loan so prepaid will be paid
only to the date of prepayment or liquidation. Interest shortfalls also could
result from the application of the Solders' and Sailors' Civil Relief Act of
1940, as amended, as described under "Certain Legal Aspects of the Mortgage
Loans- Soldiers' and Sailors' Civil Relief Act" herein. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Mortgage Loans so prepaid on the first day of the month of receipt or the
month following receipt. In the latter case, partial prepayments will not
reduce the amount of interest passed through in such month. Prepayment
penalties collected with respect to Multifamily Loans will be distributed to
the holders of Certificates, or to other persons entitled thereto, as
described in the related Prospectus Supplement.
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Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or another person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Certificates. See "The Pooling and Servicing Agreement-Termination; Optional
Termination."
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely,
if prevailing interest rates rise appreciably above the Mortgage Rates borne
by the Mortgage Loans, such Mortgage Loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below such Mortgage
Rates. However, there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayment on Single
Family Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net
equity in the mortgage properties, the enforcement of due-on-sale clauses and
other servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage
loans, graduated payment mortgage loans, growing equity mortgage loans,
reverse mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage
loans. The rate of prepayment on Multifamily Loans may be affected by other
factors, including Mortgage Loan terms (e.g., the existence of lockout
periods, due-on-sale and due-on-encumbrance clauses and prepayment penalties),
relative economic conditions in the area where the Mortgaged Properties are
located, the quality of management of the Mortgaged Properties and the
relative tax benefits associated with the ownership of income-producing real
property.
The timing of payments on the Mortgage Assets may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase)
in the rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on each Mortgage Loan from the
first day of the month, the distribution of such interest will not be made
earlier than a specified date in the month following the month of accrual.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Certificates purchased at
a premium, a faster than anticipated rate of principal payments could result
in an actual yield that is lower than the anticipated yield. A discount or
premium would be determined in relation to the price at which a Certificate
will yield its Pass-Through Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Certificates. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be no
assurance as to the rate of payment of principal of the Mortgage Assets at any
time or over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such Certificates.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates of a Series, the Seller will cause the Mortgage Loans comprising
the related Trust Fund to be sold and assigned to the Trustee, together with
all principal and interest received by or on behalf of the Seller on or with
respect to such Mortgage Loans after the Cut-off Date, other than principal
and interest due on or before the Cut-off Date and other than any Retained
Interest specified in the Prospectus Supplement. The Trustee will,
concurrently with such assignment, deliver the Certificates to the Seller in
exchange for the Mortgage Loans. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include information as to the outstanding principal balance of each Mortgage
Loan after application of payments due on the Cut-off Date, as well as
information regarding the Mortgage Rate or APR, the current scheduled monthly
payment of principal and interest, the maturity of the loan, the Loan-to-Value
Ratio at origination and certain other information.
In addition, unless otherwise specified in the Prospectus Supplement, the
Seller will deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan, among other
things, (i) the mortgage note or Contract endorsed without recourse in blank
or to the order of the Trustee, (ii) in the case of Single Family Loans or
Multifamily Loans, the mortgage, deed of trust or similar instrument (a
"Mortgage") with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case the
Seller will deliver or cause to be delivered a copy of such Mortgage together
with a certificate that the original of such Mortgage was or will be delivered
to such recording office), (iii) an assignment of the Mortgage or Contract to
the Trustee, which assignment will be in recordable form in the case of a
Mortgage assignment, and (iv) such other security documents as may be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, (i) in the case of Single Family Loans or
Multifamily Loans, the Seller or Master Servicer will promptly cause the
assignments of the related Mortgage Loans to be recorded in the appropriate
public office for real property records, except in the discretion of the
Seller in states in which, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in
such loans against the claim of any subsequent transferee or any successor to
or creditor of the Seller or the originator of such loans, and (ii) in the
case of Contracts, the Seller or Master Servicer will promptly make or cause
to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the
Seller will cause to be delivered to the Trustee (or to the custodian
hereinafter referred to), the related original cooperative note endorsed
without recourse in blank or to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Seller will cause to be filed
in the appropriate office an assignment and a financing statement evidencing
the Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found
to be missing or defective in any material respect, the Trustee (or such
custodian) will notify the Master Servicer and the Seller, and the Master
Servicer will notify the related Lender. Unless otherwise specified in the
related Prospectus Supplement, if the Lender or an entity which sold the
Mortgage Loan to the Lender cannot cure the omission or defect within 60 days
after receipt of such notice, the Lender or such entity will be obligated to
purchase the related Mortgage Loan from the Trustee at the Purchase Price.
There can be no assurance that a Lender or such entity will fulfill this
purchase obligation. Although the Master Servicer may be obligated to
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enforce such obligation to the extent described above under "Mortgage Loan
Program-Representations by Lenders; Repurchases," neither the Master Servicer
nor the Seller will be obligated to purchase such Mortgage Loan if the Lender
or such entity defaults on its purchase obligation, unless such breach also
constitutes a breach of the representations or warranties of the Master
Servicer or the Seller, as the case may be. Unless otherwise specified in the
related Prospectus Supplement, this purchase obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for omission of, or
a material defect in, a constituent document. Certain rights of substitution
for defective Mortgage Loans may be provided with respect to a Series in the
related Prospectus Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Mortgage Loans as agent of the Trustee.
Assignment of Agency Securities. The Seller will cause Agency Securities
to be registered in the name of the Trustee or its nominee, and the Trustee
concurrently will execute, countersign and deliver the Certificates. Each
Agency Security will be identified in a schedule appearing as an exhibit to
the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Seller will cause
Private Mortgage-Backed Securities to be registered in the name of the
Trustee. The Trustee (or the custodian) will have possession of any
certificated Private Mortgage-Backed Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Mortgage-Backed
Security. See "The Trust Fund-Private Mortgage-Backed Securities" herein. Each
Private Mortgage-Backed Security will be identified in a schedule appearing as
an exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date for each Private Mortgage-
Backed Security conveyed to the Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement or
provided in the Agreement, each Master Servicer and Sub-Servicer servicing the
Mortgage Loans will be required to establish and maintain for one or more
Series of Certificates a separate account or accounts for the collection of
payments on the related Mortgage Assets (the "Protected Account"), which must
be either (i) maintained with a depository institution the debt obligations of
which (or in the case of a depository institution that is the principal
subsidiary of a holding company, the obligations of such holding company) are
rated in one of the two highest rating categories by each Rating Agency rating
the Series of Certificates, (ii) an account or accounts the deposits in which
are fully insured by the FDIC, (iii) an account or accounts the deposits in
which are insured by the FDIC (to the limits established by the FDIC), and the
uninsured deposits in which are invested in Permitted Investments held in the
name of the Trustee, or (iv) an account or accounts otherwise acceptable to
each Rating Agency. A Protected Account may be maintained as an interest
bearing account or the funds held therein may be invested pending each
succeeding Distribution Date in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, the related Master Servicer or
Sub-Servicer or its designee will be entitled to receive any such interest or
other income earned on funds in the Protected Account as additional
compensation and will be obligated to deposit in the Protected Account the
amount of any loss immediately as realized. The Protected Account may be
maintained with the Master Servicer or Sub-Servicer or with a depository
institution that is an affiliate of the Master Servicer or Sub-Servicer,
provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer will be required to deposit or
cause to be deposited in the Protected Account for each Trust Fund on a daily
basis, to the extent applicable and unless otherwise specified in the related
Prospectus Supplement or provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal Prepayments
and, if specified in the related Prospectus Supplement, prepayment penalties,
on the Mortgage Loans;
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(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) to the extent specified in the related Agreement, all proceeds (net
of unreimbursed payments of property taxes, insurance premiums and similar
items ("Insured Expenses") incurred, and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) of the title insurance
policies, the hazard insurance policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation
or foreclosure ("Liquidation Expenses") and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received
with respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "Mortgage Loan Program-Representations by
Lenders; Repurchases" or "-Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described
under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or Sub-
Servicer in connection with losses realized on investments for the benefit of
the Master Servicer or Sub-Servicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the Protected Account
pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Certificates, a
Protected Account maintained by a Master Servicer or Sub-Servicer may
commingle funds from the Mortgage Loans deposited in the Trust Fund with
similar funds relating to other mortgage loans which are serviced or owned by
the Master Servicer or Sub-Servicer. The Agreement may require that certain
payments related to the Mortgage Assets be transferred from a Protected
Account maintained by a Master Servicer or Sub-Servicer into another Account
maintained under conditions acceptable to each Rating Agency.
The Trustee will be required to establish in its name as Trustee for one
or more Series of Certificates a trust account or another account acceptable
to each Rating Agency (the "Certificate Account"). The Certificate Account may
be maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments.
If there is more than one Master Servicer for the rated Series of
Certificates, there may be a separate Certificate Account or a separate
subaccount in a single Certificate Account for funds received from each Master
Servicer. Unless otherwise specified in the Prospectus Supplement, the related
Master Servicer or its designee will be entitled to receive any interest or
other income earned on funds in the Certificate Account or subaccount of the
Certificate Account as additional compensation and will be obligated to
deposit in the Certificate Account or subaccount the amount of any loss
immediately as realized. The Trustee will be required to deposit into the
Certificate Account on the business day received all funds received from the
Master Servicer for deposit into the Certificate Account and any other amounts
required to be deposited into the Certificate Account pursuant to the
Agreement. In addition to other purposes specified in the Agreement, the
Trustee will be required to make withdrawals from the Certificate Account to
make distributions to Certificateholders. If the Series includes one Trust
Fund which contains a beneficial ownership interest in another Trust Fund,
funds from the Mortgage Assets may be withdrawn from the Certificate Account
included in the latter Trust Fund and deposited into another Account included
in the former Trust Fund prior to transmittal to Certificateholders with a
beneficial ownership interest in the former Trust Fund. If specified in the
related Prospectus Supplement, the Protected Account and the Certificate
Account may be combined into a single Certificate Account.
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SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing entity
may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While each Sub-
Servicing Agreement will be a contract solely between the Master Servicer and
the Sub-Servicer, the Agreement pursuant to which a Series of Certificates is
issued will provide that, if for any reason the Master Servicer for such
Series of Certificates is no longer the Master Servicer of the related
Mortgage Loans, the Trustee or any successor Master Servicer must recognize
the Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but, unless otherwise
specified in the Prospectus Supplement, such Sub-Servicer will remain
obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be
required to perform the customary functions of a servicer of mortgage loans.
Such functions generally include collecting payments from mortgagors or
obligors and remitting such collections to the Master Servicer; maintaining
hazard insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder, subject in certain
cases to the right of the Master Servicer to approve in advance any such
settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Mortgage Loan; processing
assumptions or substitutions, although, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer is generally required to
exercise due-on-sale clauses to the extent such exercise is permitted by law
and would not adversely affect insurance coverage; attempting to cure
delinquencies; supervising foreclosures; inspecting and managing Mortgaged
Properties under certain circumstances; maintaining accounting records
relating to the Mortgage Loans; and, to the extent specified in the related
Prospectus Supplement, maintaining additional insurance policies or credit
support instruments and filing and settling claims thereunder. A Sub-Servicer
will also be obligated to make advances in respect of delinquent installments
of principal and interest on Mortgage Loans, as described more fully above
under "-Payments on Mortgage Loans; Deposits to Accounts," and in respect of
certain taxes and insurance premiums not paid on a timely basis by mortgagors
or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Mortgage Loan has been collected) in the amount set forth in the
related Prospectus Supplement. Each Sub-Servicer is also entitled to collect
and retain, as part of its servicing compensation, any prepayment or late
charges provided in the mortgage note or related instruments. Each Sub-
Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under the Agreement. The Master Servicer may purchase the servicing
of Mortgage Loans if the Sub-Servicer elects to release the servicing of such
Mortgage Loans to the Master Servicer. See "-Servic-ing and Other
Compensation and Payment of Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and
an errors and omissions policy with respect to its officers, employees and
other persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
may terminate a Sub-Servicing Agreement without cause, upon written notice to
the Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-
Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter
into new Sub-Servicing Agreements with other sub-servicers. If the Master
Servicer acts as servicer, it will not assume liability for the
representations and warranties of the Sub-Servicer which it replaces. Each
Sub-Servicer must be a Lender or meet the standards for becoming a Lender or
have such servicing experience as to be otherwise satisfactory
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to the Master Servicer and the Seller. The Master Servicer will make
reasonable efforts to have the new Sub-Servicer assume liability for the
representations and warranties of the terminated Sub-Servicer, but no
assurance can be given that such an assumption will occur. In the event of
such an assumption, the Master Servicer may in the exercise of its business
judgment release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement or
new Sub-Servicing Agreements may contain provisions different from those which
are in effect in the original Sub-Servicing Agreement. However, each Agreement
will provide that any such amendment or new agreement may not be inconsistent
with or violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Mortgage
Loans and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to mortgage loans that are comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with
the coverage of such Mortgage Loan by a Pool Insurance Policy, Primary
Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance Policy,
Bankruptcy Bond or alternative arrangements, if applicable, arrange with a
Mortgagor a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment or such other
period as is specified in the Agreement. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will,
to the extent it has knowledge of such conveyance or proposed conveyance,
exercise or cause to be exercised its rights to accelerate the maturity of
such Mortgage Loan under any due-on-sale clause applicable thereto, but only
if the exercise of such rights is permitted by applicable law and will not
impair or threaten to impair any recovery under any related Primary Insurance
Policy. If these conditions are not met or if such Mortgage Loan is insured by
the FHA or partially guaranteed by the VA, the Master Servicer will enter into
or cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Mortgage Loan and, to
the extent permitted by applicable law, the mortgagor remains liable thereon;
provided, however, that the Master Servicer will not enter into such an
agreement if it would jeopardize the tax status of the Trust Fund. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. In the case of Multifamily Loans, and
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will agree to exercise any right it may have to accelerate the
maturity of a Multifamily Loan to the extent it has knowledge of any further
encumbrance of the related Mortgaged Property effected in violation of any
due-on-encumbrance clause applicable thereto. See "Certain Legal Aspects of
the Mortgage Loans-Due-on-Sale Clauses." In connection with any such
assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the
relevant Cooperative before purchasing the shares and acquiring rights under
the related proprietary lease or occupancy agreement. See "Certain Legal
Aspects of the Mortgage Loans." This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring such approval could limit the number of potential
purchasers for those shares and otherwise limit the Trust Fund's ability to
sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid
or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under
Code Sections 163 and 164. In order for a corporation to qualify under Code
Section 216(b)(1) for its taxable year in
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which such items are allowable as a deduction to the corporation, such Section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders (as defined in Code
Section 216(b)(2)). By virtue of this requirement, the status of a corporation
for purposes of Code Section 216(b)(1) must be determined on a year-to-year
basis. Consequently, there can be no assurance that Cooperatives relating to
the Cooperative Loans will qualify under such Section for any particular year.
In the event that such a Cooperative fails to qualify for one or more years,
the value of the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to tenant-
stockholders under Code Section 216(a) with respect to those years. In view of
the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each Single
Family Loan, Multifamily Loan or Contract to maintain a hazard insurance
policy providing for no less than the coverage of the standard form of fire
insurance policy with extended coverage customary for the type of Mortgaged
Property in the state in which such Mortgaged Property is located. Such
coverage will be in an amount not less than the replacement value of the
improvements or Manufactured Home securing such Mortgage Loan or the principal
balance owing on such Mortgage Loan, whichever is less. All amounts collected
by the Master Servicer under any hazard policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Protected Account. In
the event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Mortgage Loans comprising part of a Trust Fund, it
will conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Protected Account the amounts which would have been
deposited therein but for such clause. Any additional insurance coverage for
Mortgaged Properties in a Mortgage Pool of Multifamily Loans will be specified
in the related Prospectus Supplement.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements or Manufactured Home
securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm and
hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to
the Mortgage Loans may have been underwritten by different insurers under
different state laws in accordance with different applicable forms and
therefore may not contain identical terms and conditions, the basic terms
thereof are dictated by respective state laws, and most such policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mud flows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive. If the
Mortgaged Property securing a Mortgage Loan is located in a federally
designated special flood area at the time of origination, the Master Servicer
will require the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the insured property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, then the insurer's liability in the event of partial
loss will not exceed the larger of (i) the actual cash value (generally
defined as replacement cost at the time and place of loss, less physical
depreciation) of the improvements damaged or destroyed or (ii) such proportion
of the loss, without deduction for depreciation, as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements. Since the amount of hazard insurance the Master Servicer may
cause to be maintained on the improvements securing the Mortgage Loans
declines as the principal balances owing thereon decrease, and since improved
real estate generally has appreciated in value over time in the past, the
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
If specified in the related Prospectus Supplement, a special hazard insurance
policy or an alternative form of credit
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enhancement will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement-Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value
of the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Insurance Policies. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus
Supplement, a Primary Insurance Policy with regard to each Single Family Loan
for which such coverage is required. The Master Servicer will be required not
to cancel or refuse to renew any such Primary Insurance Policy in effect at
the time of the initial issuance of a Series of Certificates that is required
to be kept in force under the applicable Agreement unless the replacement
Primary Insurance Policy for such canceled or nonrenewed policy is maintained
with an insurer whose claims-paying ability is sufficient to maintain the
current rating of the classes of Certificates of such Series that have been
rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment
of the Mortgage Loan, (iii) amounts expended but not approved by the issuer of
the related Primary Insurance Policy (the "Primary Insurer"), (iv) claim
payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. Primary Insurance Policies will not
insure against, and exclude from coverage, a loss sustained by reason of a
default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans;
(iii) physical damage to the Mortgaged Property; and (d) the related Master
Servicer not being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Insurance Policy. As conditions precedent to
the filing of or payment of a claim under a Primary Insurance Policy covering
a Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes,
(2) all expenses required to maintain the related Mortgaged Property in at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted, (3) Mortgaged Property
sales expenses, (4) any outstanding liens (as defined in such Primary
Insurance Policy) on the Mortgaged Property and (5) foreclosure costs,
including court costs and reasonable attorneys' fees; (ii) in the event of any
physical loss or damage to the Mortgaged Property, have restored and repaired
the Mortgaged Property to at least as good a condition as existed at the
effective date of such Primary Insurance Policy, ordinary wear and tear
excepted; and (iii) tender to the Primary Insurer good and merchantable title
to and possession of the Mortgaged Property.
In those cases in which a Single Family Loan is serviced by a Sub-
Servicer, the Sub-Servicer, on behalf of itself, the Trustee and
Certificateholders, will present claims to the Primary Insurer, and all
collections thereunder will
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be deposited in the Protected Account maintained by the Sub-Servicer. In all
other cases, the Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the Primary Insurer under each
Primary Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Insurance Policy and, when the Mortgaged
Property has not been restored, the hazard insurance policy, are to be
deposited in the Protected Account, subject to withdrawal as heretofore
described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related hazard insurance policy are
insufficient to restore the damaged Mortgaged Property to a condition
sufficient to permit recovery under the related Primary Insurance Policy, if
any, the Master Servicer is not required to expend its own funds to restore
the damaged Mortgaged Property unless it determines (i) that such restoration
will increase the proceeds to Certificateholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the Mortgaged Property securing the defaulted Mortgage Loan are
less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of expenses incurred
by the Master Servicer in connection with such proceedings and which are
reimbursable under the Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Protected Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Protected Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up
to the amount so charged. See "Credit Enhancement."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
described in the Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Mortgage Loan, such amounts will
decrease as the Mortgage Loans amortize. In addition to primary compensation,
the Master Servicer or the Sub-Servicers will be entitled to retain all
assumption fees and late payment charges, to the extent collected from
Mortgagors, and, unless otherwise provided in the related Prospectus
Supplement or Agreement, any prepayment penalties and any interest or other
income which may be earned on funds held in any Accounts. Unless otherwise
specified in the related Prospectus Supplement, any Sub-Servicer will receive
a portion of the Master Servicer's primary compensation as its sub-servicing
compensation.
In addition to amounts payable to any Sub-Servicer, to the extent
specified in the related Agreement, the Master Servicer will pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment in
certain cases of premiums for insurance policies, guarantees, sureties or
other forms of credit enhancement, payment of the fees and disbursements of
the Trustee and independent accountants, payment of expenses incurred in
connection with distributions and reports to Certificateholders, and payment
of certain other expenses. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Sub-
Servicers and Sellers under certain limited circumstances. In
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addition, as indicated in the preceding section, the Master Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection
with any defaulted Mortgage Loan as to which it has determined that all
recoverable Liquidation Proceeds and Insurance Proceeds have been received.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC,
the servicing by or on behalf of the Master Servicer of mortgage loans, agency
securities or private mortgage-backed securities, under pooling and servicing
agreements substantially similar to each other (including the related
Agreement) was conducted in compliance with such agreements except for any
significant exceptions or errors in records that, in the opinion of the firm,
the Uniform single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC requires it to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of mortgage
loans, agency securities or private mortgage-backed securities by Sub-
Servicers, upon comparable statements for examinations conducted substantially
in compliance with the Uniform Single Audit Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for FHLMC or FNMA (rendered within
one year of such statement) of firms of independent public accountants with
respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of each Master Servicer to the effect that such Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of each Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that a Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer
has assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, in
certain instances, the Seller nor any director, officer, employee, or agent of
the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the
Master Servicer, the Seller nor any such person will be protected against any
breach of warranties or representations made in the Agreement or any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. Each Agreement will
further provide that the Master Servicer, in certain instances, the Seller and
any director, officer, employee or agent of the Master Servicer or the Seller
will be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Certificates, other than any
loss, liability or expense related to any specific Mortgage Loan or Mortgage
Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide
that neither the Master Servicer nor, in certain instances, the Seller will be
under any obligation to appear
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in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Seller may,
however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Certificateholders thereunder.
In such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Master Servicer or the Seller, as the case may be, will be entitled to
be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
Any person into which the Master Servicer may be merged or consolidated,
or any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the class or classes of Certificates of such Series that
have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement or
Agreement, "Events of Default" under each Agreement will include (i) any
failure by the Master Servicer to cause to be deposited in the Certificate
Account any amount so required to be deposited pursuant to the Agreement, and
such failure continues unremedied for two business days or such other time
period as is specified in the Agreement; (ii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for sixty
days or such other time period as is specified in the Agreement after the
giving of written notice of such failure to the Master Servicer by the
Trustee, or to the Master Servicer and the Trustee by the holders of
Certificates of any class evidencing not less than 25% of the aggregate
principal amount or interests ("Percentage Interests") evidenced by such
class; and (iii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceeding and certain actions
by or on behalf of the Master Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the Prospectus Supplement, the Agreement will permit the
Trustee to sell the Mortgage Assets and the other assets of the Trust Fund in
the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only
under the circumstances and in the manner specified in the Prospectus
Supplement.
RIGHTS UPON EVENT OF DEFAULT
Except as otherwise specified in the related Agreement, so long as an
Event of Default under an Agreement remains unremedied, the Trustee may, and
at the direction of holders of Certificates evidencing Percentage Interests
aggregating not less than 25% of the principal of the related Trust Fund and
under such circumstances as may be specified in such Agreement, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer
under the Agreement relating to such Trust Fund and in and to the Mortgage
Loans, whereupon, unless otherwise specified in the related Prospectus
Supplement, the Trustee will succeed to all of the responsibilities, duties
and liabilities of the Master Servicer under the Agreement, including, if
specified in the Prospectus Supplement, the obligation to make advances, and
will be entitled to similar compensation arrangements. In the event that the
Trustee is unwilling or unable so to act, it may appoint, or petition a court
of competent jurisdiction for the appointment of, a Mortgage Loan servicing
institution with a net worth of at least $10,000,000 to act as successor to
the Master Servicer under the Agreement. Pending such appointment, the Trustee
is obligated to act in such capacity. The Trustee and any such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation payable to the Master Servicer under the
Agreement.
Except as otherwise specified in the related Agreement, no
Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
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Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
AMENDMENT
Unless otherwise specified in the Prospectus Supplement, each Agreement
may be amended by the Seller, each Master Servicer and the Trustee, without
the consent of any of the Certificateholders, (i) to cure any ambiguity; (ii)
to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
Certificateholder. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Certificateholders, to change the manner in which the Certificate Account, the
Protected Account or any other Accounts are maintained, provided that any such
change does not adversely affect the then current rating on the class or
classes of Certificates of such Series that have been rated. In addition, if a
REMIC election is made with respect to a Trust Fund, the related Agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the related Trust Fund as
a REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such
qualification. Unless otherwise specified in the Prospectus Supplement, each
Agreement may also be amended by the Seller, each Master Servicer and the
Trustee with consent of holders of Certificates of such Series evidencing not
less than 66% of the aggregate Percentage Interests of each class affected
thereby for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the Agreement or of modifying in any
manner the rights of the holders of the related Certificates; provided,
however, that no such amendment may (i) reduce in any manner the amount of or
delay the timing of, payments received on Mortgage Assets which are required
to be distributed on any Certificate without the consent of the holder of such
Certificate, or (ii) reduce the aforesaid percentage of Certificates of any
class of holders which are required to consent to any such amendment without
the consent of the holders of all Certificates of such class covered by such
Agreement then outstanding. If a REMIC election is made with respect to a
Trust Fund, the Trustee will not be entitled to consent to an amendment to the
related Agreement without having first received an opinion of counsel to the
effect that such amendment will not cause such Trust Fund to fail to qualify
as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in any
Accounts or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any such Mortgage Assets remaining in the Trust Fund and (ii)
the purchase by the Master Servicer or other entity specified in the related
Prospectus Supplement including, if REMIC treatment has been elected, by the
holder of the residual interest in the REMIC (see "Certain Federal Income Tax
Consequences" below), from the related Trust Fund of all of the remaining
Mortgage Assets and all property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage
Assets evidenced by a Series of Certificates will be made at the option of the
Master Servicer or other entity at a price, and in accordance with the
procedures, specified in the Prospectus Supplement. The exercise of such right
will effect early retirement of the Certificates of that Series, but the right
of the Master Servicer or other entity to so purchase is subject to the
principal balance of the related Mortgage Assets being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Assets at the Cut-off Date for the Series.
The foregoing is subject to the provision that if a REMIC election is made
with respect to a Trust Fund, any repurchase pursuant to clause (ii) above
will be made only in connection with a "qualified liquidation" of the REMIC
within the meaning of Section 860F(g)(4) of the Code.
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THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Seller, each Master Servicer
and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state, or to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified
in their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
Single Family Loans and Multifamily Loans. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state
in which the property subject to the loan is located. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order
of recording with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. The mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-
property owner called the trustor (similar to a mortgagor), a lender (similar
to a mortgagee) called the beneficiary, and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the
trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the
underlying debt is repaid. The mortgagee's authority under a mortgage, the
trustee's authority under a deed of trust and the grantee's authority under a
security deed or deed to secure debt are governed by law and, with respect to
some deeds of trust, the directions of the beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is
a form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit
and also owns a proportionate undivided interest in all parts of the
condominium building (other than the individual condominium units) and all
areas or facilities, if any, for the common use of the condominium units. The
condominium unit owners appoint or elect the condominium association to govern
the affairs of the condominium.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii) leases the land generally by a long-term ground
lease and owns the apartment building. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupants under proprietary leases or occupancy
agreements to which the Cooperative is a party are generally subordinate to
the interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its
blanket mortgage, the mortgagee holding
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the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative
to refinance this mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust Fund including Cooperative
Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-
stockholder's pro rata share of the Cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a Cooperative and accompanying
rights is financed through a Cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related Cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the Cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of Cooperative shares.
Contracts. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest
in the Manufactured Home to secure repayment of such loan. The Contracts
generally are "chattel paper" as defined in the UCC in effect in the states in
which the Manufactured Homes initially were registered. Pursuant to the UCC,
the rules governing the sale of chattel paper are similar to those governing
the perfection of a security interest in chattel paper. Unless otherwise
specified in the Prospectus Supplement, under the Agreement, the Seller will
transfer or cause the transfer of physical possession of the Contracts to the
Trustee or its custodian. In addition the Seller will make or cause to be made
an appropriate filing of a UCC-1 financing statement in the appropriate states
to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted
by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by
the motor vehicles department (or a similar entity) of such state. In the
states which have enacted certificate of title laws, a security interest in a
unit of manufactured housing, so long as it is not attached to land in so
permanent a fashion as to become a fixture, is generally perfected by the
recording of such interest on the certificate of title to the unit in the
appropriate motor vehicle registration office or by delivery of the required
documents and payment of a fee to such office, depending on state law. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be required to effect such notation or delivery of the required documents
and fees, and to obtain possession of the certificate of title, as appropriate
under the laws of the state in which any Manufactured Home is registered. If
the Master Servicer fails, due to clerical errors or otherwise, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a
few states), the Trustee may not have a first priority security interest in
the Manufactured Home securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be
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rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. In order to perfect a
security interest in a Manufactured Home under real estate laws, the holder of
the security interest must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate
records office of the county where the home is located. Generally, Contracts
will contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by
the certificate of title laws or the UCC, and the notation of the security
interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest
in the Manufactured Home. If, however, a Manufactured Home is permanently
attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained
by the Seller and transferred to the Seller.
The Seller will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Seller,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Seller or the Lender will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Seller's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest might not be held effective against creditors of the Seller
or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien of
the Trustee on the certificate of title or delivery of the required documents
and fees should be sufficient to protect the Trustee against the rights of
subsequent purchasers of a Manufactured Home or subsequent lenders who take a
security interest in the Manufactured Home. If there are any Manufactured
Homes as to which the security interest assigned to the Seller and the Trustee
is not perfected, such security interest would be subordinate to, among
others, subsequent purchasers for value of Manufactured Homes and holders of
perfected security interests. There also exists a risk in not identifying the
Trustee, on behalf of the Certificateholders as the new secured party on the
certificate of title that, through fraud or negligence, the security interest
of the Trustee could be released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws
of most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and re-register the Manufactured
Home in such state, and if steps are not taken to re-perfect the Trustee's
security interest in such state, the security interest in the Manufactured
Home would cease to be perfected. A majority of states generally require
surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Trustee must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states which provide for notation of lien, the Master Servicer
would receive notice of surrender if the security interest in the Manufactured
Home is noted on the certificate of title. Accordingly, the Trustee would have
the opportunity to re-perfect its security interest in the Manufactured Home
in the state of relocation. In states which do not require a certificate of
title for registration of a Manufactured Home, re-registration could defeat
perfection. Similarly, when an obligor under a manufactured housing
conditional sales contract sells a Manufactured Home, the obligee must
surrender possession of the certificate of title or it will receive notice as
a result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. The Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
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Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge
of any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans and Multifamily Loans. Foreclosure of a deed of trust
is generally accomplished by a non-judicial sale under a specific provision in
the deed of trust which authorizes the trustee to sell the property at public
auction upon any default by the borrower under the terms of the note or deed
of trust. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor, to any person who has recorded a request for a
copy of any notice of default and notice of sale, to any successor in interest
to the borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. Before such non-judicial sale takes place, typically a
notice of sale must be posted in a public place and published during a
specific period of time in one or more newspapers, posted on the property, and
sent to parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In general, the borrower, or any other
person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the mortgage is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions,
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. For the
most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust does not
involve sufficient state action to afford constitutional protection to the
borrower.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction
plan, some states require that a purchaser at a foreclosure sale take the
property subject to rent control and rent stabilization laws which apply to
certain tenants who elected to remain in the building but who did not purchase
shares in the Cooperative when the building was so converted.
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Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on
a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the Cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
Contracts. The Master Servicer on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, generally varying from
10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to
resale of the unit so that the debtor may redeem at or before such resale. In
the event of such repossession and resale of a Manufactured Home, the Trustee
would be
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entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan. However,
some states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
Single Family Loans and Multifamily Loans. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has
run.
Contracts. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The
law in most states also requires that the debtor be given notice of sale prior
to the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment
is a personal judgment against the borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of
the real property sold at the foreclosure sale. As a result of these
prohibitions, it is anticipated that in many instances the Master Servicer
will not seek deficiency judgments against defaulting mortgagors. Under the
laws applicable in most states, a creditor is entitled to obtain a deficiency
judgment for any deficiency following possession and resale of a Manufactured
Home. However, some states impose prohibitions or limitations on deficiency
judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
court determines that the value of the mortgaged property is less than the
principal balance of the mortgage loan, for the reduction of the secured
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Mortgage Loans underlying a Series of
Certificates and possible reductions in the aggregate amount of such payments.
Some states also have homestead exemption laws which would protect a principal
residence from a liquidation in bankruptcy.
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Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal and
state laws impose specific statutory liabilities upon lenders who fail to
comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor
on the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation
to make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the
mortgagor or secured party. The Garn-St Germain Depository Institutions Act of
1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise
its rights under a due-on-sale clause, notwithstanding the fact that a
transfer of the property may have occurred. The inability to enforce a due-on-
sale clause may result in transfer of the related Mortgaged Property to an
uncreditworthy person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of Single Family Loans,
Cooperative Loans or Contracts with respect to prepayments on loans secured by
liens encumbering owner-occupied residential properties. Since many of the
Mortgaged Properties will be owner-occupied, it is anticipated that prepayment
charges may not be imposed with respect to many of the Single Family Loans,
Cooperative Loans and Contracts. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Single Family Loans,
Cooperative Loans or Contracts having higher Mortgage Rates or APR's, may
increase the likelihood of refinancing or other early retirement of such loans
or contracts. Legal restrictions, if any, on prepayment of Multifamily Loans
will be described in the related Prospectus Supplement.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized
to issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the federal
law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien
on certain kinds of manufactured housing. The Contracts would be covered if
they satisfy certain conditions, among other things, governing the terms of
any prepayment, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit. Title V authorized any state to
reimpose limitations on interest rates and finance charges by adopting before
April 1, 1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V was not so rejected,
any state is authorized by the law to adopt a provision limiting discount
points or other charges on loans covered by Title V. In any state in which
application of Title V was expressly rejected or a provision limiting discount
points or other charges has been adopted, no Contract which imposes finance
charges or provides for discount points or charges in excess of permitted
levels will be included in any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the mortgage loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Master Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Unless otherwise provided in the applicable Prospectus
Supplement, any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
Certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the Master Servicer to foreclose on an affected Mortgage
Loan during the borrower's period of active duty status. Thus, in the event
that such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into
many building materials utilized in manufactured and other housing. As a
consequence, lawsuits may arise from time to time asserting claims against
manufacturers or builders of the housing, suppliers of component parts, and
related persons in the distribution process. Plaintiffs have won such
judgments in certain such lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by
a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Lender, and the Certificateholders would
suffer a loss only to the extent that (i) the
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Lender breached its obligation to repurchase the Contract in the event an
obligor is successful in asserting such a claim, and (ii) the Lender, the
Seller or the Trustee were unsuccessful in asserting any claim of contribution
or subrogation on behalf of the Certificateholders against the manufacturer or
other persons who were directly liable to the plaintiff for the damages.
Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising
from formaldehyde and certain other chemicals in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances
may have claims and defenses against the builders which could be asserted
against the Trust Fund.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and
state environmental laws concerning hazardous waste, hazardous substances,
gasoline, radon and other materials which may affect the property securing the
Mortgage Assets. For example, under the federal Comprehensive Environmental
Response Compensation and Liability Act, as amended, and possibly under state
law in certain states, a secured party which takes a deed in lieu of
foreclosure or purchases a mortgaged property at a foreclosure sale may become
liable in certain circumstances for the costs of a remedial action ("Cleanup
Costs") if hazardous wastes or hazardous substances have been released or
disposed of on the property. Such Cleanup Costs may be substantial. It is
possible that such costs could become a liability of the Trust Fund and reduce
the amounts otherwise distributable to the Certificateholders if a Mortgaged
Property securing a Mortgage Loan became the property of the Trust Fund in
certain circumstances and if such Cleanup Costs were incurred. Moreover,
certain states by statute impose a lien for any Cleanup Costs incurred by such
state on the property that is the subject of such Cleanup Costs (a
"Superlien"). All subsequent liens on such property are subordinated to such
Superlien and, in some states, even prior recorded liens are subordinated to
such Superliens. In the latter states, the security interest of the Trustee in
a property that is subject to such a Superlien could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereby. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect
(or, in the case of certain regulations, proposed), all of which are subject
to change or possibly differing interpretations. Because tax consequences may
vary based upon the status or tax attributes of the owner of a Certificate,
prospective investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of Certificates. For purposes of this tax discussion
(except with respect to information reporting, or where the context indicates
otherwise), the terms "Certificateholder" and "holder" mean the beneficial
owner of a Certificate and the term "Mortgage Loan" includes Agency Securities
and Private Mortgage-Backed Securities.
REMIC ELECTIONS
Under the Code, an election may be made with respect to each Trust Fund
related to a series of Certificates to treat such Trust Fund or certain assets
of such Trust Fund as a REMIC. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election will be made with respect
to the related Trust Fund. To the extent provided in the Prospectus Supplement
for a series, Certificateholders may also have the benefit of a Reserve
Account and of certain agreements (each, a "Yield Supplement Agreement") under
which payment will be made from the Reserve Account in the event that interest
accrued on the Mortgage Loans at their Mortgage Rates is insufficient to pay
interest on the Certificates of such Series (a "Basis Risk Shortfall"). If a
REMIC election is to be made, the Prospectus Supplement will designate the
Certificates of such series or the interests composing such Certificates as
"regular interests" ("REMIC Regular Certificates," which where the context so
requires includes a reference to each interest
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composing a Certificate where such interest has been designated as a regular
interest, in lieu of such Certificates) in the REMIC (within the meaning of
Section 860G(a)(l) of the Code) or as the REMIC Residual Certificates in the
REMIC (within the meaning of Section 860G(a)(2) of the Code). The terms "REMIC
Certificates" and "Non-REMIC Certificates" denote, respectively, Certificates
(or the interests composing Certificates) of a series with respect to which a
REMIC election will, or will not, be made. The discussion below is divided
into two parts, the first part applying only to REMIC Certificates and the
second part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust Fund or certain assets of
such Trust Fund as a REMIC. Qualification as a REMIC requires ongoing
compliance with certain conditions. Upon the issuance of each series of REMIC
Certificates, Stroock & Stroock & Lavan, counsel to the Seller, will deliver
its opinion generally to the effect that, with respect to each series of REMIC
Certificates for which a REMIC election is to be made, under then existing
law, and assuming a proper and timely REMIC election and ongoing compliance
with the provisions of the Agreement and applicable provisions of the Code and
applicable Treasury regulations, the related Trust Fund or certain assets of
such Trust Fund will be a REMIC and the REMIC Certificates will be considered
to evidence ownership of "regular interests" or "residual interests" within
the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, holders
of REMIC Regular Certificates who are entitled to payments from the Reserve
Account in the event of a Basis Risk Shortfall will be required to allocate
their purchase price between their beneficial ownership interests in the
related REMIC regular interests and Yield Supplement Agreements, and will be
required to report their income realized with respect to each, calculated
taking into account such allocation. In general, such allocation would be
based on the respective fair market values of the REMIC regular interests and
the related Yield Supplement Agreements on the date of purchase of the related
REMIC Regular Certificate. However, a portion of the purchase price of a REMIC
Regular Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests
and the Yield Supplement Agreements, upon initial issuance of the related
REMIC Regular Certificates or at any time thereafter. Holders of REMIC Regular
Certificates are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the Agreement, holders of
applicable REMIC Regular Certificates will agree that, for federal income tax
purposes, they will be treated as owners of the respective regular interests
and of the corresponding Yield Supplement Agreement.
Status of REMIC Certificates as Real Property Loans. The REMIC
Certificates will be "real estate assets" for purposes of Section 856(c)(5)(A)
of the Code and assets described in Section 7701(a)(19)(C) of the Code (assets
qualifying under one or both of those sections, applying each section
separately, "qualifying assets") to the extent that the REMIC's assets are
qualifying assets, but not to the extent that the REMIC's assets consist of
Yield Supplement Agreements. However, if at least 95 percent of the REMIC's
assets are qualifying assets, then 100 percent of the REMIC Certificates will
be qualifying assets. Similarly, income on the REMIC Certificates will be
treated as "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Mortgage Loans, the
REMIC's assets will include payments on Mortgage Loans held pending
distribution to holders of REMIC Certificates, amounts in Reserve Accounts (if
any), other credit enhancements (if any), and possibly buydown funds ("Buydown
Funds"). The Mortgage Loans will be qualifying assets under the foregoing
sections of the Code except to the extent provided in the Prospectus
Supplement. The regulations under Sections 860A through 860G of the Code (the
"REMIC Regulations") treat credit enhancements as part of the mortgage or pool
of mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Mortgage Loans and held pending
distribution to holders of REMIC Certificates ("cash flow investments") will
be treated as qualifying assets. It is unclear whether amounts in a Reserve
Account or Buydown Funds would also constitute qualifying assets. The
Prospectus Supplement for each series will indicate (if applicable) that it
has Buydown Funds. The REMIC Certificates will not be "residential loans" for
purposes of the residential loan requirement of Section 593(g)(4)(B) of the
Code.
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TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust Fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Stroock & Stroock & Lavan will deliver its opinion generally
to the effect that, assuming compliance with all provisions of the related
Agreement and applicable provisions of the Code and applicable Treasury
regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of "regular
interests" or "residual interests" in the related REMIC within the meaning of
the REMIC provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and assets described in Section 7701(a)(19)(C) of the Code, and whether the
income on such Certificates is interest described in Section 856(c)(3)(B) of
the Code, the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates-General. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a
fixed rate, a variable rate as permitted by the REMIC Regulations, or may
consist of a specified portion of the interest payments on qualified mortgages
where such portion does not vary during the period the REMIC Regular
Certificate is outstanding. The definition of a variable rate for purposes of
the REMIC Regulations is based on the definition of a qualified floating rate
for purposes of the rules governing original issue discount set forth in
Sections 1271 through 1275 of the Code and the regulations thereunder (the
"OID Regulations") with certain modifications and permissible variations. See
"REMIC Regular Certificates-Current Income on REMIC Regular Certificates-
Original Issue Discount-Variable Rate REMIC Regular Certificates," below, for
a discussion of the definition of a qualified floating rate for purposes of
the OID Regulations. In contrast to the OID Regulations, for purposes of the
REMIC Regulations, a qualified floating rate does not include any multiple of
a qualified floating rate (also excluding multiples of qualified floating
rates that themselves would constitute qualified floating rates under the OID
Regulations), and the characterization of a variable rate that is subject to a
cap, floor or similar restriction as a qualified floating rate for purposes of
the REMIC Regulations will not depend upon the OID Regulations relating to
caps, floors, and similar restrictions. See "REMIC Regular Certificates-
Current Income on REMIC Regular Certificates-Original Issue Discount-Variable
Rate REMIC Regular Certificates," below, for a discussion of the OID
Regulations relating to caps, floors and similar restrictions. A qualified
floating rate, as defined above for purposes of the REMIC Regulations (a
"REMIC qualified floating rate"), qualifies as a variable rate for purposes of
the REMIC Regulations if such REMIC qualified floating rate is set at a
"current rate" as defined in the OID Regulations. In addition, a rate equal to
the highest, lowest or an average of two or more REMIC qualified floating
rates qualifies as a variable rate for REMIC purposes. A REMIC Regular
Certificate may also have a variable rate based on a weighted average of the
interest rates on some or all of the qualified mortgages held by the REMIC
where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a
REMIC Regular Certificate may have a rate that is the product of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier, is
a constant number of basis points more or less than a REMIC qualified floating
rate or a weighted average rate, or is the product, plus or minus a constant
number of basis points, of a REMIC qualified floating rate or a weighted
average rate and a fixed multiplier. An otherwise permissible variable rate
for a REMIC Regular Certificate, described above, will not lose its character
as such because it is subject to a floor or a cap, including a "funds
available cap" as that term is defined in the REMIC Regulations. Lastly, a
REMIC Regular Certificate will be considered as having a permissible variable
rate if it has a fixed or otherwise permissible variable rate
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during one or more payment or accrual periods and different fixed or otherwise
permissible variable rates during other payment or accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to
the original issue discount accruing on any REMIC Regular Certificate be
reported periodically to the Internal Revenue Service and to certain
categories of holders of such REMIC Regular Certificates.
Each Trust Fund will report original issue discount, if any, to the
holders of REMIC Regular Certificates based on the OID Regulations. OID
Regulations concerning contingent payment debt instruments do not apply to the
REMIC Regular Certificates.
The OID Regulations provide that, in the case of a debt instrument such
as a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment
rate (the "Prepayment Assumption"), and (ii) adjustments will be made in the
amount and rate of accrual of such discount to reflect differences between the
actual prepayment rate and the Prepayment Assumption. The method for
determining the appropriate assumed prepayment rate will eventually be set
forth in Treasury regulations, but those regulations have not yet been issued.
The applicable legislative history indicates, however, that such regulations
will provide that the assumed prepayment rate for securities such as the REMIC
Regular Certificates will be the rate used in pricing the initial offering of
the securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity
exceeds its issue price. Except as discussed below under "Payment Lag REMIC
Regular Certificates; Initial Period Considerations," and "Qualified Stated
Interest," and in the case of certain Variable Rate REMIC Regular Certificates
(as defined below) and accrual certificates, the stated redemption price at
maturity of a REMIC Regular Certificate is its principal amount. The issue
price of a REMIC Regular Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of
the class of REMIC Regular Certificates was sold. The issue price will be
reduced if any portion of such price is allocable to a related Yield
Supplement Agreement. Notwithstanding the general definition of original issue
discount, such discount will be considered to be zero for any REMIC Regular
Certificate on which such discount is less than 0.25% of its stated redemption
price at maturity multiplied by its weighted average life. The weighted
average life of a REMIC Regular Certificate apparently is computed for
purposes of this de minimis rule as the sum, for all distributions included in
the stated redemption price at maturity of the REMIC Regular Certificate, of
the amounts determined by multiplying (i) the number of complete years
(rounding down for partial years) from the Closing Date to the date on which
each such distribution is expected to be made, determined under the Prepayment
Assumption, by (ii) a fraction, the numerator of which is the amount of such
distribution and the denominator of which is the REMIC Regular Certificate's
stated redemption price at maturity. The OID Regulations provide that holders
will include any de minimis original issue discount ratably as payments of
stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount
that accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
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The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price
at maturity, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that the REMIC Regular Certificates will be prepaid in
future periods at a rate computed in accordance with the Prepayment Assumption
and (ii) using a discount rate equal to the original yield to maturity of the
REMIC Regular Certificates. For these purposes, the original yield to maturity
of the REMIC Regular Certificates will be calculated based on their issue
price and assuming that the REMIC Regular Certificates will be prepaid in
accordance with the Prepayment Assumption. The adjusted issue price of a REMIC
Regular Certificate at the beginning of any accrual period will equal the
issue price of such REMIC Regular Certificate, increased by the portion of the
original issue discount that has accrued during prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods that were included in such REMIC Regular
Certificate's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although not entirely free from doubt, such a holder may be entitled
to deduct a loss to the extent that its remaining basis would exceed the
maximum amount of future payments to which such holder is entitled. It is
unclear whether the Prepayment Assumption is taken into account for this
purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued
with original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in
gross income, for each day on which it holds such REMIC Regular Certificate,
the daily portions of original issue discount with respect to the REMIC
Regular Certificate, calculated as described above. However, if (i) the excess
of the remaining stated redemption price at maturity over such cost is less
than (ii) the aggregate amount of such daily portions for all days after the
date of purchase until final retirement of such REMIC Regular Certificate,
then such daily portions will be reduced proportionately in determining the
income of such holder.
Qualified Stated Interest. Interest payable on a REMIC Regular
Certificate which qualifies as "qualified stated interest" for purposes of the
OID Regulations will not be includable in the stated redemption price at
maturity of the REMIC Regular Certificate. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the
terms and conditions of the Mortgage Loans underlying the REMIC Regular
Certificates or the terms and conditions of the REMIC Regular Certificates are
considered when determining whether the likelihood of late payment or
nonpayment of interest is a remote contingency. Any terms or conditions that
do not reflect arm's length dealing or that the holder does not intend to
enforce are not considered.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated
redemption price at maturity will be considered to have purchased such REMIC
Regular Certificate at a premium, and may, under Section 171 of the Code,
elect to amortize such premium under a constant yield method over the life of
the REMIC Regular Certificate. The Prepayment Assumption is probably taken
into account in determining the life of the REMIC Regular Certificate for this
purpose. Except as provided in regulations, amortizable premium will be
treated as an offset to interest income on the REMIC Regular Certificate.
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Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues
prior to the Closing Date may be treated under the OID Regulations either (i)
as part of the issue price and the stated redemption price at maturity of the
REMIC Regular Certificates or (ii) as not included in the issue price or the
stated redemption price. The OID Regulations provide a special application of
the de minimis rule for debt instruments with long first accrual periods where
the interest payable for the first period is at a rate which is effectively
less than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest
or the excess (if any) of the instrument's stated principal amount over its
issue price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable
Rate REMIC Regular Certificate") are subject to special rules. A Variable Rate
REMIC Regular Certificate will qualify as a "variable rate debt instrument" if
(i) its issue price does not exceed the total noncontingent principal payments
due under the Variable Rate REMIC Regular Certificate by more than a specified
de minimis amount; (ii) it provides for stated interest, paid or compounded at
least annually, at (a) one or more qualified floating rates, (b) a single
fixed rate and one or more qualified floating rates, (c) a single objective
rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate; and (iii) it does not provide for any
principal payments that are contingent, as defined in the OID Regulations,
except as provided in (i), above. Because the OID Regulations relating to
contingent payment debt instruments do not apply to REMIC regular interests,
principal payments on the REMIC Regular Certificates should not be considered
contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple
that is greater than 0.65 but not more than 1.35 or (ii) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35, increased or decreased by a fixed rate will constitute a
qualified floating rate for purposes of the OID Regulations. In addition,
under the OID Regulations, two or more qualified floating rates that can
reasonably be expected to have approximately the same values throughout the
term of the Variable Rate REMIC Regular Certificate will be treated as a
single qualified floating rate (a "Presumed Single Qualified Floating Rate").
Two or more qualified floating rates with values within 25 basis points of
each other as determined on the Variable Rate REMIC Regular Certificate's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate, but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating
rate for purposes of the OID Regulations unless the restriction is fixed
throughout the term of the Variable Rate REMIC Regular Certificate or the
restriction is not reasonably expected as of the issue date to significantly
affect the yield of the Variable Rate REMIC Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on
a REMIC Regular Certificate that is the weighted average of the interest rates
on some or all of the qualified mortgages held by the REMIC should constitute
an objective rate. Despite the foregoing, a variable rate of interest on a
Variable Rate REMIC Regular Certificate will not constitute an objective rate
if it is reasonably expected that the average value of such rate during the
first half of the Variable Rate REMIC Regular Certificate's term will be
either significantly less than or significantly greater than the average value
of the rate during the final half of the Variable Rate REMIC Regular
Certificate's term. Further, an objective rate does not include a rate that is
based on information that is within the control of the issuer (or a party
related to the issuer) or that is unique to the circumstances of the issuer
(or a party related to the issuer). An objective rate will qualify as a
"qualified inverse floating rate" if such rate is equal to a fixed rate minus
a qualified floating rate and variations in the rate can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate. The OID Regulations also provide that if a Variable Rate REMIC
Regular Certificate provides for stated interest at a fixed rate for an
initial period of less than one
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year followed by a variable rate that is either a qualified floating rate or
an objective rate and if the variable rate on the Variable Rate REMIC Regular
Certificate's issue date is intended to approximate the fixed rate, then the
fixed rate and the variable rate together will constitute either a single
qualified floating rate or objective rate, as the case may be (a "Presumed
Single Variable Rate"). If the value of the variable rate and the initial
fixed rate are within 25 basis points of each other as determined on the
Variable Rate REMIC Regular Certificate's issue date, the variable rate will
be conclusively presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout
the term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates-Current
Income on REMIC Regular Certificates-Original Issue Discount" based on the
following: (i) stated interest on the Single Variable Rate REMIC Regular
Certificate which is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually will constitute qualified
stated interest; (ii) by assuming that the variable rate on the Single
Variable Rate REMIC Certificate is a fixed rate equal to: (a) in the case of a
Single Variable Rate REMIC Regular Certificate with a qualified floating rate
or a qualified inverse floating rate, the value, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate REMIC Regular Certificate with an objective
rate (other than a qualified inverse floating rate), a fixed rate which
reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Certificate; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid
during an accrual period exceeds (or is less than) the interest assumed to be
paid under the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate
REMIC Regular Certificate") that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Multiple Variable Rate REMIC Regular
Certificate. The OID Regulations generally require that such a Multiple
Variable Rate REMIC Regular Certificate be converted into an "equivalent"
fixed rate debt instrument by substituting any qualified floating rate or
qualified inverse floating rate provided for under the terms of the Multiple
Variable Rate REMIC Regular Certificate with a fixed rate equal to the value
of the qualified floating rate or qualified inverse floating rate, as the case
may be, as of the Multiple Variable Rate REMIC Regular Certificate's issue
date. Any objective rate (other than a qualified inverse floating rate)
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate is converted into a fixed rate that reflects the yield that is
reasonably expected for the Multiple Variable Rate REMIC Regular Certificate.
(A Multiple Variable Rate REMIC Regular Certificate may not bear more than one
objective rate.) In the case of a Multiple Variable Rate REMIC Regular
Certificate that qualifies as a "variable rate debt instrument" and provides
for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate
is initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable
Rate REMIC Regular Certificate as of the Multiple Variable Rate REMIC Regular
Certificate's issue date is approximately the same as the fair market value of
an otherwise identical debt instrument that provides for either the qualified
floating rate or qualified inverse floating rate rather than the fixed rate.
Subsequent to converting the fixed rate into either a qualified floating rate
or a qualified inverse floating rate, the Multiple Variable Rate REMIC Regular
Certificate is then converted into an "equivalent" fixed rate debt instrument
in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing
rules, the amounts of original issue discount and qualified stated interest,
if any, are determined for the "equivalent" fixed rate debt instrument by
applying the original issue discount rules to the "equivalent" fixed rate debt
instrument in the manner described in "REMIC Regular Certificates-Current
Income on REMIC Regular Certificates-Original Issue Discount". A holder of the
Multiple Variable Rate REMIC Regular Certificate will account for such
original issue discount and qualified stated interest as if the holder held
the "equivalent" fixed rate debt instrument. In each accrual period,
appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the "equivalent"
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fixed rate debt instrument in the event that such amounts differ from the
actual amount of interest accrued or paid on the Multiple Variable Rate REMIC
Regular Certificate during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. It is not clear under current law how a Variable Rate REMIC
Regular Certificate would be taxed if such REMIC Regular Certificate were
treated as a contingent payment debt obligation since the OID Regulations
relating to contingent payment debt obligations do not apply to REMIC regular
interests.
Interest-Only REMIC Regular Certificates. The Trust Fund intends to
report income from interest-only REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates
based on the assumption that the stated redemption price at maturity is equal
to the sum of all payments determined under the Prepayment Assumption. As a
result, such interest-only REMIC Regular Certificates will be treated as
having original issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on
such REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise,
market discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion
to accruals of original issue discount (or, if there is no original issue
discount, in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion
of the holder's interest expense on any debt incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Certificate that accrues during the
taxable year in which such interest would otherwise be deductible and, in
general, would be deductible when such market discount is included in income
upon receipt of a principal distribution on, or upon the sale of, the REMIC
Regular Certificate. The Code requires that information necessary to compute
accruals of market discount be reported periodically to the Internal Revenue
Service and to certain categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25%
of the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted
average remaining life presumably is calculated in a manner similar to
weighted average life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the
REMIC Regular Certificate in proportion to the amounts of such principal
distributions, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such
debt instrument using the constant yield method. For purposes of this
election, interest includes stated interest, original issue discount, and
market discount, as adjusted to account for any premium. Holders of REMIC
Regular Certificates should consult their own tax advisors regarding the
availability or advisability of such an election.
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Single-Class REMICs. In the case of "single-class REMICs," certain
expenses of the REMIC will be allocated to the holders of the REMIC Regular
Certificates. The deductibility of such expenses may be subject to certain
limitations. See "Deductibility of Trust Fund Expenses" below.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate
generally equals the cost of the REMIC Regular Certificate to the holder,
increased by income reported by the holder with respect to the REMIC Regular
Certificate and reduced (but not below zero) by distributions on the REMIC
Regular Certificate received by the holder and by amortized premium. Except as
indicated in the next two paragraphs, any such gain or loss generally will be
capital gain or loss provided the REMIC Regular Certificate is held as a
capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of "the
applicable Federal rate" (generally, an average of current yields on Treasury
securities), determined as of the date of purchase of the REMIC Regular
Certificate, over (ii) the amount actually includable in the seller's income.
In addition, gain recognized on the sale of a REMIC Regular Certificate by a
seller who purchased the REMIC Regular Certificate at a market discount would
be taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period the REMIC Regular Certificate was held
by such seller, reduced by any market discount includable in income under the
rules described above under "Current Income on REMIC Regular Certificates-
Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
a sale of a REMIC Regular Certificate by a bank or other financial institution
to which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate, if not earlier, shortly following
the REMIC's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a REMIC Regular Certificate
should be treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests
is "portfolio income" which cannot be offset by "passive activity losses" in
the hands of individuals or other persons subject to the passive loss rules.
The Code also provides that all residual interests must be issued on the
REMIC's startup day and designated as such. For this purpose, "startup day"
means the day on which the REMIC issues all of its regular and residual
interests, and under the REMIC Regulations may, in the case of a REMIC to
which property is contributed over a period of up to ten consecutive days, be
any day designated by the REMIC within such period.
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The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC
must be the calendar year. The basis of property contributed to the REMIC in
exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair
market value of the contributed property by deeming it equal to the aggregate
issue prices of all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Loans held by the REMIC must be
included in the income of the REMIC as it accrues, rather than being included
in income only upon sale of the Mortgage Loans or as principal on the Mortgage
Loans is paid. The REMIC is not entitled to any personal exemptions or to
deductions for taxes paid to foreign countries and U.S. possessions,
charitable contributions or net operating losses, or to certain other
deductions to which individuals are generally entitled. Income or loss in
connection with a "prohibited transaction" is disregarded. See "Prohibited
Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. Although not entirely free from doubt, the related REMIC taxable
income may be recognized when the adjusted issue price of such REMIC Regular
Certificate would exceed the maximum amount of future payments with respect to
such REMIC Regular Certificate. It is unclear whether the Prepayment
Assumption is taken into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that
is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (i.e., the
purchase price of the REMIC Residual Certificate), and will be reduced (but
not below zero) by the holder's share of cash distributions and losses and
increased by its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its
REMIC Residual Certificate. A return of capital is not treated as income for
federal income tax purposes, but will reduce the tax basis of the holder in
its REMIC Residual Certificate (but not below zero). If a REMIC Residual
Certificate's basis is reduced to zero, any cash distributions with respect to
that REMIC Residual Certificate in any taxable year in excess of its share of
the REMIC's income would be taxable to the holder as gain on the sale or
exchange of its interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to qualified mortgages, on the one hand,
and the timing of deductions for interest (including original issue discount)
on the REMIC Regular Certificates, on the other. In the case of multiple
classes of REMIC Regular Certificates issued at different yields, and having
different weighted average lives, taxable income recognized by the holders of
REMIC Residual Certificates may be greater than cash flow in earlier years of
the REMIC (with a corresponding taxable loss or less taxable income than cash
flow in later years). This may result from the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
the REMIC Regular Certificates, will increase over time as the shorter term,
lower yielding classes of REMIC Regular Certificates are paid, whereas
interest income from the Mortgage Loans may not increase over time as a
percentage of the outstanding principal amount of the Mortgage Loans.
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In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Loans (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes
of the original issue discount provisions. Therefore, the Trust Fund will
calculate the taxable income of Tiered REMICs by treating the Lower Tier REMIC
regular interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily
accruals for such quarterly period. The daily accrual for any day on which the
REMIC Residual Certificate is held is determined by allocating to each day in
a quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus
the amount of the daily accruals of REMIC taxable income for all prior
quarters, decreased by any distributions made with respect to such
Certificates prior to the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset
by other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular
taxable income computed without regard to the rule that taxable income cannot
be less than the amount of excess inclusions, (ii) the alternative minimum
taxable income of a taxpayer for a taxable year cannot be less than the amount
of excess inclusions for that year, and (iii) the amount of any alternative
minimum tax net operating loss is computed without regard to any excess
inclusions. While these provisions are generally effective for tax years
beginning after December 31, 1986, a taxpayer may elect to have these
provisions apply only with respect to tax years beginning after August 20,
1996.
If the holder of a REMIC Residual Certificate is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the
excess inclusions will be treated as unrelated business taxable income of such
holder for purposes of Code Section 511. In addition, the Code provides that
under Treasury regulations, if a real estate investment trust ("REIT") owns a
REMIC Residual Certificate, to the extent excess inclusions of the REIT exceed
its real estate investment trust taxable income (excluding net capital gains),
the excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion,
except as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is
not considered to be "significant," then the entire share of REMIC taxable
income of a holder of a REMIC Residual Certificate may be treated as excess
inclusions subject to the foregoing limitations. This authority has not been
exercised to date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a qualified mortgage other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a qualified mortgage or certain other
permitted investments, or gain from the disposition of an asset representing a
temporary investment of payments on the qualified mortgages pending
distribution on the REMIC Certificates. In addition, a tax is imposed on the
REMIC equal to 100 percent of the value of certain property contributed to the
REMIC after its "startup day." No REMIC in which interests are offered
hereunder will accept contributions that would cause it to be subject to such
tax. This provision will not affect a REMIC's ability in accordance with the
Agreement to accept substitute Mortgage Loans or to sell defective Mortgage
Loans.
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A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust Fund initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificates, unless
otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark to Market REMIC Residual Certificates. Temporary
regulations provide that "negative-value" REMIC Residual Certificates are not
securities and cannot be marked to market pursuant to Section 475 of the Code
(relating to the requirement that dealers in securities mark them to market).
A REMIC Residual Certificate is a negative-value REMIC Residual Certificate if
on the date the dealer acquires the REMIC Residual Certificate the present
value of the anticipated tax liabilities associated with holding the REMIC
Residual Certificate (net of the present value of the tax savings resulting
from losses associated with holding the REMIC Residual Certificate) exceeds
the present value of the expected future distributions on the REMIC Residual
Certificate. Proposed regulations would provide that all REMIC Residual
Certificates acquired on or after January 4, 1995 are not securities and
cannot be marked to market pursuant to Section 475 of the Code.
The anticipated and expected tax consequences and distributions are
determined by taking into account events that have occurred through the date
of acquisition, the Prepayment Assumption and reinvestment assumption adopted
when the residual was created, and by taking account of required liquidations
and required or permitted clean up calls.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of
the REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital
gain or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be
considered a sale of property other than a capital asset, resulting in
ordinary income or loss. Although the tax treatment with respect to a REMIC
Residual Certificate that has unrecovered basis after all funds of the Trust
Fund have been distributed is unclear, the holder presumably would be entitled
to claim a loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event,
any loss realized by the seller on the sale generally will not be currently
deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where
the transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United
States, any State or political subdivision thereof, any foreign government,
any international organization or agency or instrumentality of the foregoing
(with an exception for certain taxable instrumentalities of the United States,
of a State or of a political subdivision thereof), any rural electrical and
telephone cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total
anticipated excess inclusions for periods after such transfer with respect to
the interest transferred multiplied by the highest corporate rate of tax. The
transferor (or agent, as the case may be) will be relieved
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of liability so long as the transferee furnishes an affidavit that it is not a
disqualified organization and the transferor or agent does not have actual
knowledge that the affidavit is false. Under the REMIC Regulations, an
affidavit will be sufficient if the transferee furnishes (A) a social security
number, and states under penalties of perjury that the social security number
is that of the transferee, or (B) a statement under penalties of perjury that
it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a
REMIC Residual Certificate. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear. The preamble to the REMIC Regulations
indicates that the Internal Revenue Service is considering the tax treatment
of these types of residual interests. A transferee of such an interest should
consult its own tax advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. An entity or
segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(i.e., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that
neither the transferee nor any person for whose account such transferee is
acquiring the REMIC Residual Certificate is a disqualified organization. In
addition, as to the requirement that reasonable arrangements be made to ensure
that disqualified organizations do not hold a residual interest in the REMIC,
the REMIC Regulations require that notice of the prohibition be provided
either through a legend on the certificate that evidences ownership, or
through a conspicuous statement in the prospectus or other offering document
used to offer the residual interest for sale. As to the requirement that
sufficient information be made available to calculate the tax on transfers to
disqualified organizations (or the tax, discussed below, on pass-through
entities, interests in which are held by disqualified organizations), the
REMIC Regulations further require that such information also be provided to
the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated
as "pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the
entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless
the proposed transferee provides to the Trustee an affidavit that such
transferee is not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Fund Expenses" below. No prediction can be made
regarding whether such legislation or similar legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate, and
(2) the transferor reasonably expects that for each anticipated excess
inclusion, the transferee will receive distributions
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from the REMIC, at or after the time at which taxes on such excess inclusion
accrue, sufficient to pay the taxes thereon. A significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of
the transfer, either knew or should have known (had "improper knowledge") that
the transferee would be unwilling or unable to pay taxes due on its share of
the taxable income of the REMIC. A transferor will be presumed not to have
improper knowledge if (i) the transferor conducts, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor finds that
the transferee has historically paid its debts as they came due and finds no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future, and (ii) the transferee represents
to the transferor that (A) the transferee understands that it might incur tax
liabilities in excess of any cash received with respect to the residual
interest and (B) the transferee intends to pay the taxes associated with
owning the residual interest as they come due. Any transferee of a REMIC
Residual Certificate must execute and deliver to the transferor an affidavit
containing the representations described in (ii) above. A different
formulation of this rule applies to transfers of REMIC Residual Certificates
by or to foreign transferees. See "Foreign Investors" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Certificates that is an individual, estate or trust
will be subject to the limitation with respect to certain itemized deductions
described in Code Section 67, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income,
and such holder may not be able to deduct such fees and expenses to any extent
in computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount"
($100,000 (or $50,000 in the case of a separate return by a married
individual), adjusted for changes in the cost of living subsequent to 1990)
will be reduced by the lesser of (i) 3 percent of the excess of adjusted gross
income over the applicable amount, or (ii) 80 percent of the amount of
itemized deductions otherwise allowable for such taxable year. Such deductions
will include servicing, guarantee, and administrative fees paid to the Master
Servicer of the Mortgage Loans. These deductions will be allocated entirely to
the holders of the REMIC Residual Certificates in the case of REMIC Trust
Funds with multiple classes of REMIC Regular Certificates that do not pay
their principal amounts ratably. As a result, the REMIC will report additional
taxable income to holders of REMIC Residual Certificates in an amount equal to
their allocable share of such deductions, and individuals, estates, or trusts
holding an interest in such REMIC Residual Certificates may have taxable
income in excess of the cash received. In the case of a "single-class REMIC,"
the expenses will be allocated, under Treasury regulations, among the holders
of the REMIC Regular Certificates and the REMIC Residual Certificates on a
daily basis in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In the case of a holder of a REMIC Regular
Certificate who is an individual or a "pass-through interest holder"
(including certain pass-through entities, but not including REITs), the
deductibility of such expenses will be subject to the limitations described
above. The reduction or disallowance of these deductions may have a
significant impact on the yield of REMIC Regular Certificates to such a
holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were
not a REMIC (treating all interests as ownership interests, even if they would
be classified as debt for federal income purposes) or (ii) is similar to such
a trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a
REMIC Regular Certificate who is not a "United States person" (as defined
below) generally will not be subject to United States income or withholding
tax in respect of a distribution on a REMIC Regular Certificate, provided that
(i) the holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder
of the REMIC Regular Certificate under penalties of perjury, certifying that
the holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a "10-
percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of
a residual interest in the REMIC, and (iv) the holder is not engaged in a
United States trade or business, or otherwise
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subject to federal income tax as a result of any direct or indirect connection
to the United States other than through its ownership of a REMIC Regular
Certificate. For these purposes, the term "United States person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate whose income is includable
in gross income for United States federal income taxation regardless of its
source, and (iv) a trust for which one or more United States fiduciaries have
the authority to control all substantial decisions and for which a court of
the United States can exercise primary supervision over the trust's
administration. For years beginning before January 1, 1997, the term "United
States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax
years ending after August 20, 1996. Proposed Treasury regulations, which would
be effective with respect to payments made after December 31, 1997 if adopted
in their current form, would provide alternative certification requirements
and means by which a holder of REMIC Certificates could claim the exemption
from federal income and withholding tax.
REMIC Residual Certificates. The Conference Report to the Tax Reform Act
of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a
30% withholding tax. The withholding tax on interest does not apply, however,
to "portfolio interest" (if certain certifications as to beneficial ownership
are made, as discussed above under "Foreign Investors-Regular Certificates")
or to the extent a tax treaty reduces or eliminates the tax. Treasury
regulations provide that amounts paid with respect to residual interests
qualify as portfolio interest only if interest on the qualified mortgages held
by the REMIC qualifies as portfolio interest. Generally, interest on Mortgage
Loans held by a Trust Fund will not qualify as portfolio interest, although
interest on the Private Mortgage-Backed Securities, other pass-through
certificates, or REMIC regular interests held by a Trust Fund may qualify. In
any case, a holder of a REMIC Residual Certificate will not be entitled to the
portfolio interest exception from the 30% withholding tax (or to any treaty
exemption or rate reduction) for that portion of a payment that constitutes
excess inclusions. Generally, the withholding tax will be imposed when REMIC
gross income is paid or distributed to the holder of a residual interest or
there is a disposition of the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless
at the time of the transfer, the transferor reasonably expects that (1) the
future distributions on the REMIC Residual Certificate will equal at least 30
percent of the anticipated excess inclusions and (2) such amounts will be
distributed at or after the time at which the excess inclusion accrues, but
not later than the close of the calendar year following the calendar year of
accrual. A safe harbor in the REMIC Regulations provides that the reasonable
expectation requirement will be satisfied if the above test would be met at
all assumed prepayment rates for the Mortgage Loans from 50 percent of the
Prepayment Assumption to 200 percent of the Prepayment Assumption. A transfer
by a foreign transferor to a domestic transferee will likewise be disregarded
under the REMIC Regulations if the transfer would have the effect of allowing
the foreign transferor to avoid the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale
of REMIC Certificates to or through certain brokers may be subject to a
"backup" withholding tax of 31 percent of "reportable payments" (including
interest accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC
Certificates would be refunded by the Internal Revenue Service or allowable as
a credit against the holder's federal income tax.
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REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and Schedules
Q thereto) must be filed as if the Trust Fund were a partnership for federal
income tax purposes. Information on Schedule Q must be provided to holders of
REMIC Residual Certificates with respect to every calendar quarter. Each
holder of a REMIC Residual Certificate will be required to treat items on its
federal income tax returns consistently with their treatment on the Trust
Fund's information returns unless the holder either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from an incorrect schedule received from the Trust Fund. The Trust Fund also
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination of any adjustments to,
among other things, items of REMIC taxable income by the Internal Revenue
Service. Holders of REMIC Residual Certificates will have certain rights and
obligations with respect to any administrative or judicial proceedings
involving the Internal Revenue Service. Under the Code and Regulations, a
REMIC generally is required to designate a tax matters person. Generally,
subject to various limitations, the tax matters person has authority to act on
behalf of the REMIC and the holders of the REMIC Residual Certificates in
connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC. Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the
extent allowable, the Seller or its designee will act as the tax matters
person for each REMIC. Each holder of a REMIC Residual Certificate, by the
acceptance of its interest in the REMIC Residual Certificate, agrees that the
Seller or its designee will act as the holder's fiduciary in the performance
of any duties required of the holder in the event that the holder is the tax
matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made.
Tax Status of the Trust Fund. Upon the issuance of each series of Non-
REMIC Certificates, Stroock & Stroock & Lavan, counsel to the Seller, will
deliver its opinion to the effect that, under then current law, assuming
compliance with the Agreement, the related Trust Fund will be classified for
federal income tax purposes as a grantor trust and not as an association
taxable as a corporation or a taxable mortgage pool. Accordingly, each holder
of a Non-REMIC Certificate will be treated for federal income tax purposes as
the owner of an undivided interest in the Mortgage Loans included in the Trust
Fund. As further described below, each holder of a Non-REMIC Certificate
therefore must report on its federal income tax return the gross income from
the portion of the Mortgage Loans that is allocable to such Non-REMIC
Certificate and may deduct the portion of the expenses incurred by the Trust
Fund that is allocable to such Non-REMIC Certificate, at the same time and to
the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Loans and received
directly its share of the payments on the Mortgage Loans and incurred directly
its share of expenses incurred by the Trust Fund when those amounts are
received or incurred by the Trust Fund.
A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount"
($100,000 (or $50,000 in the case of a separate return by a married
individual), adjusted for changes in the cost of living subsequent to 1990)
will be reduced by the lesser of (i) 3 percent of the excess of adjusted gross
income over the applicable amount, or (ii) 80 percent of the amount of
itemized deductions otherwise allowable for such taxable year. A holder of a
Non-REMIC Certificate that is not a corporation cannot deduct such expenses
for purposes of the alternative minimum tax (if applicable). Such deductions
will include servicing, guarantee and administrative fees paid to the servicer
of the Mortgage Loans. As a result, individuals, estates, or trusts holding
Non-REMIC Certificates may have taxable income in excess of the cash received.
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Status of the Non-REMIC Certificates as Real Property Loans. The Non-
REMIC Certificates generally will be "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code and "loans... secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code, and
interest income on the Non-REMIC Certificates generally will be "interest on
obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code. However, the Non-REMIC Certificates may not
be qualifying assets under the foregoing sections of the Code to the extent
that the Trust Fund's assets include Buydown Funds, amounts in a Reserve
Account, or payments on mortgages held pending distribution to
Certificateholders. The Non-REMIC Certificates should not be "residential
loans made by the taxpayer" for purposes of the residential loan requirement
of Section 593(g)(4)(B) of the Code.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may
contend that the stripped bond rules apply on the ground that the Master
Servicer's servicing fee, or other amounts, if any, paid to (or retained by)
the Master Servicer or its affiliates, as specified in the applicable
Prospectus Supplement, represent greater than an arm's length consideration
for servicing the Mortgage Loans. In Revenue Ruling 91-46, the Internal
Revenue Service concluded that retained interest in excess of reasonable
compensation for servicing is treated as a "stripped coupon" under the rules
of Code Section 1286.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-REMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-REMIC Certificate will account for any discount on
the Non-REMIC Certificate (other than an interest treated as a "stripped
coupon") as market discount rather than original issue discount if either (i)
the amount of original issue discount with respect to the Non-REMIC
Certificate was treated as zero under the original issue discount de minimis
rule when the Non-REMIC Certificate was stripped or (ii) no more than 100
basis points (including any amount of servicing in excess of reasonable
servicing) is stripped off from the Mortgage Loans. If neither of the above
exceptions applies, the original issue discount rules will apply to the Non-
REMIC Certificates. See "REMIC Regular Interests-Current Income on REMIC
Regular Interests-Original Issue Discount" and "-Market Discount" above.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year
equal to the income that accrues on the Non-REMIC Certificate in that year
calculated under a constant yield method based on the yield of the Non-REMIC
Certificate (or, possibly, the yield of each Mortgage Loan underlying such
Non-REMIC Certificate) to such holder. Such yield would be computed at the
rate that, if used in discounting the holder's share of the payments on the
Mortgage Loans, would cause the present value of those payments to equal the
price at which the holder purchased the Non-REMIC Certificate. With respect to
certain categories of debt instruments, Section 1272(a)(6) of the Code
requires that original issue discount be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. It is
unclear whether such regulations would apply this rule to the Non-REMIC
Certificates, whether Section 1272(a)(6) might apply to the Non-REMIC
Certificates in the absence of such regulations, or whether the Internal
Revenue Service could require use of a reasonable prepayment assumption based
on other tax law principles. If required to report interest income on the Non-
REMIC Certificates to the Internal Revenue Service under the stripped bond
rules, it is anticipated that the Trustee will calculate the yield of the Non-
REMIC Certificates based on a representative initial offering price of the
Non-REMIC Certificates and a reasonable assumed rate of prepayment of the
Mortgage Loans (although such yield may differ from the yield to any
particular holder that would be used in calculating the interest income of
such holder). The Prospectus Supplement for each series of Non-REMIC
Certificates will describe the prepayment assumption that will be used for
this purpose, but no representation is made that the Mortgage Loans will
prepay at that rate or at any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Loans allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Non-REMIC Certificate acquired at a
discount or premium (that is, at a price less than or greater than such
principal amount,
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respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of
interest income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize
ordinary income or loss equal to the difference between the portion of the
prepaid principal amount of the Mortgage Loan that is allocable to the Non-
REMIC Certificate and the portion of the adjusted basis of the Non-REMIC
Certificate (see "Sales of Non-REMIC Certificates" below) that is allocable to
the Mortgage Loan.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-through Rate based on the weighted
average of the interest rates of the Mortgage Loans held by the Trust Fund,
which interest rates may be fixed or variable. In the case of a Variable Rate
Non-REMIC Certificate that is subject to the original issue discount rules,
the daily portions of original issue discount generally will be calculated in
the same manner as discussed above except the principles discussed in "REMIC
Regular Certificates-Current Income on REMIC Regular Certificates-Original
Issue Discounts-Variable Rate REMIC Regular Certificates" will be applied.
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply.
If the stripped bond rules do not apply to a Non-REMIC Certificate, then the
holder will be required to include in income its share of the interest
payments on the Mortgage Loans in accordance with its tax accounting method.
In addition, if the holder purchased the Non-REMIC Certificate at a discount
or premium, the holder will be required to account for such discount or
premium in the manner described below, as if it had purchased the Mortgage
Loans directly. The treatment of any discount will depend on whether the
discount with respect to the Mortgage Loans is original issue discount as
defined in the Code and, in the case of discount other than original issue
discount, whether such other discount exceeds a de minimis amount. In the case
of original issue discount, the holder (whether a cash or accrual method
taxpayer) will be required to report as additional interest income in each
month the portion of such discount that accrues in that month, calculated
based on a constant yield method. In general it is not anticipated that the
amount of original issue discount to be accrued in each month, if any, will be
significant relative to the interest paid currently on the Mortgage Loans.
However, original issue discount could arise with respect to a Mortgage Loan
("ARM") that provides for interest at a rate equal to the sum of an index of
market interest rates and a fixed number. The original issue discount for ARMs
generally will be determined under the principals discussed in "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates-Original Issue
Discount-Variable Rate REMIC Regular Certificates."
If discount on the Mortgage Loans other than original issue discount
exceeds a de minimis amount (described below), the holder will also generally
be required to include in income in each month the amount of such discount
accrued through such month and not previously included in income, but limited,
with respect to the portion of such discount allocable to any Mortgage Loan,
to the amount of principal on such Mortgage Loan received by the Trust Fund in
that month. Because the Mortgage Loans will provide for monthly principal
payments, such discount may be required to be included in income at a rate
that is not significantly slower (and, under certain circumstances, faster)
than the rate at which such discount accrues (and therefore at a rate not
significantly slower than the rate at which such discount would be included in
income if it were original issue discount). The holder may elect to accrue
such discount under a constant yield method based on the yield of the Non-
REMIC Certificate to such holder. In the absence of such an election, it may
be necessary to accrue such discount under a more rapid straight-line method.
Under the de minimis rule, market discount with respect to a Non-REMIC
Certificate will be considered to be zero if it is less than the product of
(i) 0.25% of the principal amount of the Mortgage Loans allocable to the Non-
REMIC Certificate and (ii) the weighted average life (determined using
complete years) of the Mortgage Loans remaining at the time of purchase of the
Non-REMIC Certificate. See "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates-Market Discount."
If a holder purchases a Non-REMIC Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize, as an offset to interest
income, the portion of such premium that is allocable to a Mortgage Loan under
a constant yield method based on the yield of the Mortgage Loan to such
holder, provided that such Mortgage Loan was originated after September 27,
1985. Premium allocable to a Mortgage Loan originated on or before that date
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should be allocated among the principal payments on the Mortgage Loan and
allowed as an ordinary deduction as principal payments are made or, perhaps,
upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income
or loss equal to the difference between the portion of the prepaid principal
amount of the Mortgage Loan that is allocable to the Non-REMIC Certificate and
the portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan.
Sales of Non-REMIC Certificates. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC
Certificate. In general, such adjusted basis will equal the holder's cost for
the Non-REMIC Certificate, increased by the amount of any income previously
reported with respect to the Non-REMIC Certificate and decreased by the amount
of any losses previously reported with respect to the Non-REMIC Certificate
and the amount of any distributions received thereon. Any such gain or loss
generally will be capital gain or loss if the assets underlying the Non-REMIC
Certificate were held as capital assets, except that, for a Non-REMIC
Certificate to which the stripped bond rules do not apply and that was
acquired with more than a de minimis amount of discount other than original
issue discount (see "Taxation of Non-REMIC Certificates if Stripped Bond Rules
Do Not Apply" above), such gain will be treated as ordinary interest income to
the extent of the portion of such discount that accrued during the period in
which the seller held the Non-REMIC Certificate and that was not previously
included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States
other than its ownership of a Non-REMIC Certificate will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on a Non-REMIC Certificate to the extent attributable
to Mortgage Loans that were originated after July 18, 1984, provided that the
holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the holder of the
Non-REMIC Certificate under penalties of perjury, certifying that such holder
is not a United States person and providing the name and address of such
holder). Proposed Treasury regulations, which would be effective with respect
to payments made after December 31, 1997 if adopted in their current form,
would provide alternative certification requirements and means by which a
holder of Non-REMIC Certificates could claim the exemption from federal income
and withholding tax. Interest or original issue discount on a Non-REMIC
Certificate attributable to Mortgage Loans that were originated prior to July
19, 1984 will be subject to a 30% withholding tax (unless such tax is reduced
or eliminated by an applicable tax treaty). For these purposes, the term
"United States person" means a citizen or a resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof, an estate the
income of which is subject to United States federal income taxation regardless
of its source, and a trust for which one or more United States fiduciaries
have the authority to control all substantial decisions and for which a court
of the United States can exercise primary supervision over the trust's
administration. For years beginning before January 1, 1997, the term "United
States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts just described, unless the trust elects to have its United States
status determined under the criteria described in the previous sentence for
tax years ending after August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" is generally defined as an entity that meets the
following requirements: (i) the entity is not a REMIC, (ii) substantially all
of the assets of the entity are debt obligations, and more than 50 percent of
such debt obligations consists of real estate mortgages (or interests
therein), (iii) the entity is the obligor under debt obligations with two or
more maturities, and (iv) payments on the debt obligations on which the entity
is the obligor bear a relationship to the payments on the debt obligations
which the
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entity holds as assets. With respect to requirement (iii), the Code authorizes
the Internal Revenue Service to provide by regulations that equity interests
may be treated as debt for purposes of determining whether there are two or
more maturities. If a Series of Non-REMIC Certificates were treated as
obligations of a taxable mortgage pool, the Trust Fund would be ineligible to
file consolidated returns with any other corporation and could be liable for
corporate tax. Treasury regulations do not provide for the recharacterization
of equity as debt for purposes of determining whether an entity has issued
debt with two maturities, except in the case of transactions structured to
avoid the taxable mortgage pool rules.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether
the investment satisfies the applicable diversification requirements; (iii)
whether the investment is in accordance with the documents and instruments
governing the plan; and (iv) whether the investment is prudent, considering
the nature of the investment. Fiduciaries of plans also should consider
ERISA's prohibition on improper delegation of control over, or responsibility
for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes are imposed upon
such persons by Section 4975 of the Code. The Seller, Bear, Stearns & Co.
Inc., each Master Servicer or other servicer, any Pool Insurer, any Special
Hazard Insurer, the Trustee, and certain of their affiliates might be
considered "parties in interest" or "disqualified persons" with respect to a
Plan. If so, the acquisition, holding or disposition of Certificates by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an exemption is
available. Furthermore, if an investing Plan's assets were deemed to include
the Mortgage Assets and not merely an interest in the Certificates,
transactions occurring in the management of Mortgage Assets might constitute
prohibited transactions and the fiduciary investment standards of ERISA could
apply to the assets of the Trust Fund, unless an administrative exemption
applies.
In DOL Regulation ' 2510.3-101 (the "Regulation"), the U.S. Department of
Labor has defined what constitutes Plan assets for purposes of ERISA and
Section 4975 of the Code. The Regulation provides that if a Plan makes an
investment in an "equity interest" in an entity, the assets of the entity will
be considered the assets of such Plan unless certain exceptions apply. The
Seller can give no assurance that the Certificates will qualify for any of the
exceptions under the Regulation. As a result, the Mortgage Assets may be
considered the assets of any Plan which acquires a Certificate, unless some
administrative exemption is available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under
certain conditions, exempts from the application of the prohibited transaction
rules of ERISA and the excise tax provisions of Section 4975 of the Code
transactions involving a Plan in connection with the operation of a "mortgage
pool" and the purchase, sale and holding of "mortgage pool pass-through
certificates." A "mortgage pool" is defined as an investment pool, consisting
solely of interest bearing obligations secured by first or second mortgages or
deeds of trust on single-family residential property, property acquired in
foreclosure and undistributed cash. A "mortgage pool pass-through certificate"
is defined as a certificate which represents a beneficial undivided interest
in a mortgage pool which entitles the holder to pass-through payments of
principal and interest from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the
Mortgage Loans and the property securing such Mortgage Loans, and for
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indemnifying holders of Certificates against reductions in pass-through
payments due to defaults in loan payments or property damage in an amount at
least equal to the greater of 1% of the aggregate principal balance of the
Mortgage Loans, or 1% of the principal balance of the largest covered pooled
Mortgage Loan; (ii) the Trustee may not be an affiliate of the Seller; and
(iii) the payments made to and retained by the Seller in connection with the
Trust Fund, together with all funds inuring to its benefit for administering
the Trust Fund, represent no more than "adequate consideration" for selling
the Mortgage Loans, plus reasonable compensation for services provided to the
Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Seller, the Special Hazard Insurer, the Pool
Insurer, the Master Servicer, or other servicer, or the Trustee is a party in
interest if the Plan does not pay more than fair market value for such
Certificate and the rights and interests evidenced by such Certificate are not
subordinated to the rights and interests evidenced by other Certificates of
the same pool. PTCE 83-1 also exempts from the prohibited transaction rules
any transactions in connection with the servicing and operation of the
Mortgage Pool, provided that any payments made to the Master Servicer in
connection with the servicing of the Trust Fund are made in accordance with a
binding agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other
requirements: (i) the initial sale, exchange or transfer of Certificates is
expressly approved by an independent fiduciary who has authority to manage and
control those plan assets being invested in Certificates; (ii) the Plan pays
no more for the Certificates than would be paid in an arm's length
transaction; (iii) no investment management, advisory or underwriting fee,
sale commission, or similar compensation is paid to the Seller with regard to
the sale, exchange or transfer of Certificates to the Plan; (iv) the total
value of the Certificates purchased by such Plan does not exceed 25% of the
amount issued; and (v) at least 50% of the aggregate amount of Certificates is
acquired by persons independent of the Seller, the Trustee, the Master
Servicer, and the Special Hazard Insurer or Pool Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust Fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates," and that the conditions set forth
in PTCE 83-1 would be satisfied. In addition to making its own determination
as to the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the
following general categories: single and multifamily residential or commercial
mortgages, motor vehicle receivables, consumer or commercial receivables and
guaranteed government mortgage pool certificates and the purchase, sale and
holding of mortgage-backed or asset- backed pass-through certificates
representing beneficial ownership interests in the assets of such investment
trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of the Certificates to
be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by certain Plans must be on terms that are at least as favorable
to the Plan as they would be in an arm's length transaction with an unrelated
party. Second, the rights and interests evidenced by the Certificates must not
be subordinated to the rights and interests evidenced by other certificates of
the same trust. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by
Standard & Poor's Structured Rating Group, Moody's Investors Service Inc.,
Duff & Phelps Credit Rating Co. or Fitch Investors Services, L.P. ("National
Credit Rating Agencies"). Fourth, the Trustee cannot be an affiliate of any
member of the "Restricted Group" which consists of any underwriter as defined
in PTE 90-30, the Seller, the Master Servicer, each servicer, the
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Pool Insurer, the Special Hazard Insurer and any obligor with respect to
obligations or receivables constituting more than 5% of the aggregate
unamortized principal balance of the obligations or receivables as of the date
of initial issuance of the Certificates. Fifth, the sum of all payments made
to and retained by such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made
to and retained by the Seller pursuant to the assignment of the obligations or
receivables to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any servicer must represent not more than
reasonable compensation for such person's services under the Trust Agreement
and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, (i) the investment pool consists only of assets of the type
enumerated in the exemption and which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating categories by one
of the National Credit Rating Agencies for at least one year prior to a Plan's
acquisition of certificates; and (iii) certificates evidencing interests in
such other investment pools have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as
amended. The Seller assumes that only Plans which are accredited investors
under the federal securities laws will be permitted to purchase the
Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption may
provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or
the direct or indirect acquisition or disposition in the secondary market of
the Certificates by Plans. However, no exemption is provided from the
restrictions of ERISA for the acquisition or holding of a Certificate on
behalf of an "Excluded Plan" by any person who is a fiduciary with respect to
the assets of such Excluded Plan. For purposes of the Certificates, an
Excluded Plan is a Plan sponsored by any member of the Restricted Group. In
addition, each Plan's investment in each class of Certificates cannot exceed
25% of the outstanding Certificates in the class, and after the Plan's
acquisition of the Certificates, no more than 25% of the assets over which the
fiduciary has investment authority are invested in Certificates of a trust
containing assets which are sold or serviced by the same entity. Finally, in
the case of initial issuance (but not secondary market transactions), at least
50% of each class of Certificates, and at least 50% of the aggregate interests
in the trust, must be acquired by persons independent of the Restricted Group.
Before purchasing a Certificate in reliance on any of these exemptions or
any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain
prohibited transactions to which neither PTCE 83-1 nor PTE 90-30 is
applicable, depending in part upon the type of Plan fiduciary making the
decision to acquire Certificates and the circumstances under which such
decision is made, including, but not limited to PTCE 90-1 (regarding
investments by insurance company pooled separate accounts), PTCE 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers").
However, even if the conditions specified in either of these exemptions are
met, the scope of the relief provided by these exemptions might or might not
cover all acts which might be construed as prohibited transactions.
Any Plan fiduciary considering whether to purchase a Certificate on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the
related Certificates.
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LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement and for
so long as they are rated in one of the two highest rating categories by a
least one nationally recognized statistical rating organization, the
Certificates will constitute "mortgage related securities" for purposes of
SMMEA, and as such, absent state legislation described below, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under
the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that under applicable law obligations issued by
or guaranteed as to principal and interest by the United States or any agency
or instrumentality thereof constitute legal investments for such entities.
Under SMMEA, if a state enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Certificates will constitute
legal investments for entities subject to such legislation only to the extent
provided therein. Certain states adopted legislation which limits the ability
of insurance companies domiciled in these states to purchase mortgage-related
securities, such as the Certificates.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with Certificates
without limitation as to the percentage of their assets represented thereby,
federal credit unions may invest in Certificates, and national banks may
purchase Certificates for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. (S) 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
included guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Certificates under consideration for purchase constitutes a "mortgage
related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on
a depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional
restrictions on the purchase of mortgage-backed or other securities. Investors
are urged to consult their own legal advisors prior to making any
determinations with respect to the Policy Statement or other regulatory
requirements.
The Policy Statement provides that a "high-risk mortgage security" is not
suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate
liquidity that has a closely supervised trading department is not precluded
from acquiring high-risk mortgage securities for trading purposes.
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A depository institution must ascertain and document prior to purchase
and no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis,
it must use information derived from a source that is independent of the party
from whom the product is being purchased. The institution is responsible for
ensuring that the assumptions underlying the analysis and resulting
calculations are reasonable. Reliance on analyses and documentation from a
securities dealer or other outside party without internal analyses by the
institution is unacceptable.
In general, a high-risk mortgage security is a mortgage derivative
product possessing greater price volatility than a benchmark fixed rate 30-
year mortgage-backed pass-through security. Mortgage derivative products
include CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed
securities. A mortgage derivative product that, at the time of purchase or at
a subsequent testing date, meets any one of three tests will be considered a
high-risk mortgage security. When the characteristics of a mortgage derivative
product are such that the first two tests cannot be applied (such as interest-
only strips), the mortgage derivative product remains subject to the third
test.
The three tests of a high-risk mortgage security are as follows: (i) the
mortgage derivative product has an expected weighted average life greater than
10.0 years; (ii) the expected weighted average life of the mortgage derivative
product: () extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points, or ()
shortens by more than 6.0 years, assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; and (iii) the estimated
change in the price of the mortgage derivative product is more than 17%, due
to an immediate and sustained parallel shift in the yield curve of plus or
minus 300 basis points.
When performing the price sensitivity test, the same prepayment
assumptions and same cash flows that were used to estimate average life
sensitivity must be used. The discount rate assumptions should be determined
by (i) assuming that the discount rate for the security equals the yield on a
comparable average life U.S. Treasury security plus a constant spread, (ii)
calculating the spread over Treasury rates from the bid side of the market for
the mortgage derivative product, and (iii) assuming the spread remains
constant when the Treasury curve shifts up or down 300 basis points.
Discounting the cash flows by their respective discount rates estimates a
price in the plus or minus 300 basis point environments. The initial price
must be determined by the offer side of the market and used as the base price
from which the 17% price sensitivity test will be measured.
Generally, a floating-rate debt class will not be subject to the average
life and average life sensitivity tests described above if it bears a rate
that, at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts
at least annually on a one-for-one basis with the debt class's index. The
index must be a conventional, widely-used market interest rate index such as
the London Interbank Offered Rate ("LIBOR"). Inverse floating rate debt
classes are not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or
total capital of a depository institution are considered an imprudent
investment practice. Long-maturity generally means a remaining maturity
exceeding 10 years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to
purchase Certificates representing more than a specified percentage of the
investor's assets, or to purchase certain types of Certificates, such as
residual interests or stripped mortgage-backed securities. Investors
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should consult their own legal advisors in determining whether and to what
extent the Certificates constitute legal investments for such investors and
comply with any other applicable requirements.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If so specified in the
related Prospectus Supplement, the Certificates will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Bear, Stearns & Co. Inc. ("Bear, Stearns"), an
affiliate of the Seller, acting as underwriter with other underwriters, if
any, named therein. In such event, the Prospectus Supplement may also specify
that the underwriters will not be obligated to pay for any Certificates agreed
to be purchased by purchasers pursuant to purchase agreements acceptable to
the Seller. In connection with the sale of the Certificates, underwriters may
receive compensation from the Seller or from purchasers of the Certificates in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Seller.
Alternatively, the Prospectus Supplement may specify that the
Certificates will be distributed by Bear, Stearns acting as agent or in some
cases as principal with respect to Certificates that it has previously
purchased or agreed to purchase. If Bear, Stearns acts as agent in the sale of
Certificates, Bear, Stearns will receive a selling commission with respect to
each Series of Certificates, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the Certificates sold
hereunder as of the Cut-off Date. The exact percentage for each Series of
Certificates will be disclosed in the related Prospectus Supplement. To the
extent that Bear, Stearns elects to purchase Certificates as principal, Bear,
Stearns may realize losses or profits based upon the difference between its
purchase price and the sales price. The Prospectus Supplement with respect to
any Series offered other than through underwriters will contain information
regarding the nature of such offering and any agreements to be entered into
between the Seller and purchasers of Certificates of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Seller anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates
should consult with their legal advisors in this regard prior to any such
reoffer or sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Seller by Stroock & Stroock & Lavan, Seven Hanover Square, New York, New
York 10004.
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FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the related
Prospectus Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage pass-
through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates under certain
scenarios might fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating.
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GLOSSARY
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
TERM PAGE
- ---- ----
Accounts............................................................ 30
APR................................................................. 6
ARM................................................................. 81
Accrual Certificates................................................ 32
Agency Securities................................................... 1
Agreement........................................................... 9
Available Funds..................................................... 31
Basis Risk Shortfall................................................ 64
Bear, Stearns....................................................... 88
Bankruptcy Bond..................................................... 12
Buydown Funds....................................................... 65
Buydown Loans....................................................... 5
CMO................................................................. 7
Capitalized Interest Account........................................ 9
Cede................................................................ 35
Certificateholders.................................................. 1
Certificate Account................................................. 47
Certificate Register................................................ 31
Certificates........................................................ 1
Charter Act......................................................... 22
Cleanup Costs....................................................... 64
Code................................................................ 14
Collateral Value.................................................... 18
Commission.......................................................... 2
Contracts........................................................... 1
Cooperative Loans................................................... 1
Cooperatives........................................................ 4
Current Principal Amount............................................ 33
Cut-off Date........................................................ 10
Definitive Certificates............................................. 36
Detailed Description................................................ 16
Determination Date.................................................. 31
Distribution Dates.................................................. 2
DTC................................................................. 35
ERISA............................................................... 15
Events of Default................................................... 54
FDIC................................................................ 28
FHA................................................................. 4
FHA Insurance....................................................... 30
FHA Loans........................................................... 20
FHLMC............................................................... 1
FHLMC Act........................................................... 23
FHLMC Certificate group............................................. 23
FHLMC Certificates.................................................. 7
FNMA................................................................ 1
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FNMA Certificates................................................... 6
FTC Rule............................................................ 62
GNMA................................................................ 1
GNMA Certificates................................................... 6
GNMA Issuer......................................................... 20
Garn-St Germain Act................................................. 62
Guaranty Agreement.................................................. 20
HUD................................................................. 25
Housing Act......................................................... 20
Indirect Participant................................................ 35
Insurance Proceeds.................................................. 47
Insured Expenses.................................................... 47
Lender.............................................................. 1
LIBOR............................................................... 87
Liquidation Expenses................................................ 47
Liquidation Proceeds................................................ 47
Loan-to-Value Ratio................................................. 18
Lower Tier REMIC.................................................... 74
Manufactured Homes.................................................. 20
Manufacturer's Invoice Price........................................ 18
Master Servicer..................................................... 1
Mortgage............................................................ 45
Mortgage Assets..................................................... 1
Mortgage Loans...................................................... 4
Mortgage Pool....................................................... 4
Mortgage Rate....................................................... 5
Mortgaged Property.................................................. 16
Mortgagors.......................................................... 32
Multifamily Loans................................................... 1
Multiple Variable Rate REMIC Regular Certificate.................... 70
National Credit Rating Agencies..................................... 84
NCUA................................................................ 86
Non-REMIC Certificates.............................................. 15
OID Regulations..................................................... 66
Participants........................................................ 35
Pass-Through Rate................................................... 2
Plan................................................................ 83
PMBS Agreement...................................................... 25
PMBS Issuer......................................................... 8
PMBS Servicer....................................................... 8
PMBS Trustee........................................................ 8
Percentage Interests................................................ 54
Permitted Investments............................................... 42
Policy Statement.................................................... 86
Pool Insurance Policy............................................... 12
Pool Insurer........................................................ 37
Pre-Funding Account................................................. 8
Pre-Funding Period.................................................. 8
Prepayment Assumption............................................... 67
Presumed Single Qualified Floating Rate............................. 69
Presumed Single Variable Rate....................................... 70
Primary Insurance Policy............................................ 16
Primary Insurer..................................................... 51
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Principal Prepayments............................................... 33
Private Mortgage-Backed Securities.................................. 1
Protected Account................................................... 46
PTCE 83-1........................................................... 83
PTE 90-30........................................................... 84
Purchase Price...................................................... 29
REMIC............................................................... 1
REMIC Certificates.................................................. 14
REMIC Regular Certificates.......................................... 14
REMIC Regulations................................................... 65
REMIC Residual Certificates......................................... 14
Rating Agency....................................................... 12
Record Date......................................................... 31
Refinance Loan...................................................... 18
Regulation.......................................................... 83
Relief Act.......................................................... 63
Reserve Account..................................................... 2
Restricted Group.................................................... 84
Retained Interest................................................... 30
RICs................................................................ 74
REIT................................................................ 74
SMMEA............................................................... 13
Seller.............................................................. 1
Senior Certificates................................................. 9
Single Family Loans................................................. 1
Single Variable Rate REMIC Regular Certificate Policy............... 70
Special Hazard Insurance Policy..................................... 12
Special Hazard Insurer.............................................. 38
Sub-Servicer........................................................ 13
Sub-Servicing Agreement............................................. 48
Subordinated Certificates........................................... 9
Superlien........................................................... 64
Tiered REMICs....................................................... 66
Title V............................................................. 63
Trust Fund.......................................................... 1
Trustee............................................................. 1
UCC................................................................. 35
United States person................................................ 77
VA.................................................................. 4
VA Guarantees....................................................... 30
VA Loans............................................................ 20
Variable Rate Non-REMIC Certificates................................ 81
Variable Rate REMIC Regular Certificate............................. 69
Yield Supplement Agreement.......................................... 64
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY BSMSI OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE CERTIFICATES OFFERED HEREBY NOR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON
IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS EF-
FECTING TRANSACTIONS IN THE CERTIFICATES OFFERED HEREBY, WHETHER OR NOT PARTIC-
IPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms........................................................... S-4
Description of the Mortgage Loans.......................................... S-26
ICI Funding................................................................ S-27
Description of the Certificates............................................ S-36
Yield and Prepayment Considerations........................................ S-55
The Pooling and Servicing Agreement........................................ S-67
Federal Income Tax Considerations.......................................... S-81
ERISA Considerations....................................................... S-82
Legal Investment........................................................... S-82
Restrictions on Purchase and Transfer of the
Residual Certificates..................................................... S-82
Method of Distribution..................................................... S-83
Legal Matters.............................................................. S-83
Ratings.................................................................... S-84
Index of Principal Definitions............................................. S-86
Annex A--Certain Characteristics of the
Mortgage Loans............................................................ A-1
PROSPECTUS
Prospectus Supplement...................................................... 2
Available Information...................................................... 2
Incorporation of Certain Documents By Reference............................ 2
Reports to Certificateholders.............................................. 3
Summary of Terms........................................................... 4
The Trust Fund............................................................. 16
Use of Proceeds............................................................ 26
The Seller................................................................. 27
Mortgage Loan Program...................................................... 27
Description of the Certificates............................................ 30
Credit Enhancement......................................................... 36
Yield and Prepayment Considerations........................................ 43
The Pooling and Servicing Agreement........................................ 45
Certain Legal Aspects of the Mortgage Loans................................ 56
Certain Federal Income Tax Consequences.................................... 64
ERISA Considerations....................................................... 83
Legal Investment........................................................... 86
Method of Distribution..................................................... 88
Legal Matters.............................................................. 88
Financial Information...................................................... 89
Rating..................................................................... 89
Glossary................................................................... 90
</TABLE>
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$189,244,907
(APPROXIMATE)
BEAR STEARNS
MORTGAGE SECURITIES INC.
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1996-9
----------------------------
PROSPECTUS SUPPLEMENT
----------------------------
BEAR, STEARNS & CO. INC.
DECEMBER 20, 1996
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